IRA and Roth IRA Allocation in Celestial Divide: A Guide for Tax-Aware Practitioners

Retirement accounts don't behave like cash. The tax treatment of IRAs and Roth IRAs — both now and when funds are eventually withdrawn — affects what they're actually worth to each recipient. Celestial Divide accounts for this through bid adjustments: discounts for traditional IRAs, premiums for Roth IRAs. Getting those numbers right is where the real planning work happens.

Why Retirement Accounts Require Separate Consideration

When an estate or divorce settlement includes IRAs or Roth IRAs, the face balance isn't the full story. The tax treatment of those accounts affects what they're actually worth to each recipient. Celestial Divide accounts for this through bid adjustments — discounts for traditional IRAs, premiums for Roth IRAs — and getting those numbers right is where the real planning work happens.

Traditional IRAs: Apply a Discount

A traditional IRA carries a future tax liability. When the beneficiary withdraws funds, those withdrawals are taxed as ordinary income at their marginal rate. That means a $2 million IRA isn't worth $2 million to the person receiving it — it's worth $2 million minus whatever they'll owe in taxes when they take it out.

Marginal tax rate is the right lens here. It's the rate applied to the next dollar of earned income. If a beneficiary is already in the 35% bracket, an additional dollar of IRA income costs 35 cents. If they're in the 22% bracket, it costs 22 cents.

When entering an IRA into Celestial Divide, apply a discount that reflects the expected marginal rate of the person most likely to inherit and use that account:

• 22% discount — appropriate for a beneficiary currently in the 22% bracket who plans to draw down the account near-term
• 24% discount — reasonable for someone in the 24% bracket with a few years of tax-deferred growth before withdrawals begin
• Higher discounts for beneficiaries in elevated brackets who will be pulling from a large IRA on top of existing income

If a beneficiary's expected tax rate is likely to decrease — say, in semi-retirement — the discount can be adjusted downward. A 10-year distribution window on an inherited IRA, for example, offers meaningful flexibility on the timing and rate of withdrawals.

Celestial Divide will eventually offer baseline defaults to guide these inputs. For now, the practitioner's judgment — or the client's own knowledge of their children's financial situations — is the best input.

Roth IRAs: Apply a Premium

The Roth IRA is the mirror image. Contributions were made with after-tax dollars, growth is tax-free, and qualified distributions carry no tax liability. Compared to a taxable brokerage account or cash, a Roth IRA is worth more — not the same.

How much more depends on expected returns, the holding period, and the beneficiary's tax bracket. A useful reference: assume an 8% annual return, identical investments held for 10 years in both a taxable account and a Roth IRA, with the taxable account liquidated at the end. Even at a conservative 15% capital gains rate, the Roth outperforms. At 20% or the 23.8% rate (the 20% rate plus the net investment income tax), the gap widens further.

By this model:

• A 12% premium on a Roth IRA is a reasonable baseline for most scenarios
• Up to 16% for beneficiaries with strong investment returns and elevated tax exposure
• Up to 22% in cases where both investment performance and tax brackets are high — think a high-income professional who doesn't want taxable retirement income

On the lower end, if the Roth is likely to be liquidated quickly into low-yield investments, a 1–2% premium may be all that's warranted.

For practitioners who want more precision, tools like MoneyGuidePro or eMoney can model the tax deferral benefit in detail. What Celestial Divide needs as input is the resulting premium figure.

What It Looks Like in Practice

Here's an example from an executor's view in Celestial Divide.

IRA — $2 million balance

Three beneficiaries each place bids reflecting their own tax assumptions:

• Beneficiary 1 places a 35% discount — consistent with a high earner who sees substantial tax exposure on any IRA withdrawal
• Beneficiary 2 (the designated inheritor) places roughly a 40% discount
• Beneficiary 3 places a 24% discount — the most conservative view, reflecting a lower tax bracket or longer time horizon

With the lowest discount, Beneficiary 3 is effectively bidding the most for the IRA and it's allocated to them. For estate planning purposes, the executor can then update the IRA beneficiary designation to match — assigning 100% of that account to the individual the system identified as the best fit.

Roth IRA — $1 million balance

The same three beneficiaries bid, this time with premiums:

• Two beneficiaries place 2% premiums — modest appreciation for the tax-free growth
• The third places a 15% premium — a high-income professional, in this case a physician, who has strong incentive to avoid taxable retirement income

The Roth goes to the third beneficiary. The estate is structured so that other assets with different tax profiles are assigned to offset.

Whole-Account Assignment as an Estate Planning Tool

The point of this exercise isn't to split every IRA three ways. It's to assign entire accounts to the individuals for whom they create the most value — while using other assets to balance the overall allocation.

Done well, this reflects each beneficiary's marginal tax bracket in the next generation, accounts for their income expectations, and creates an estate structure that's more tax-efficient than a uniform split.

How Often to Update

This kind of allocation modeling isn't a one-time setup. As a guideline:

• At minimum annually — brackets change, income changes, and the underlying accounts fluctuate
• More frequently if the IRAs hold riskier assets or the investment mix differs meaningfully between accounts
• As conditions approach end-of-life — at that point, aligning investment strategies across accounts and simplifying the allocation logic becomes more important than optimizing for growth

This is also a natural reason for an annual client conversation: reviewing the amended living trust, confirming beneficiary designations, and validating that the right accounts are going to the right people.

Frequently Asked Questions

What discount should I apply to a traditional IRA?

Use the expected marginal tax rate of the most likely beneficiary. For someone in the 22% bracket, a 22% discount is a reasonable starting point. For high earners in the 35% bracket who will draw down a large IRA on top of existing income, a higher discount — 35–40% — is more appropriate. The right number reflects the rate at which those future withdrawals will actually be taxed, not the current account balance.

Should all beneficiaries use the same IRA bid adjustment?

No — and that's the point. Each beneficiary enters their own bid adjustment based on their own tax situation. A high-income beneficiary and a lower-income one will value the same IRA differently, which is why private bidding exists. The system allocates the account to whoever bids highest (i.e., whoever applies the smallest discount), and uses other assets to balance the overall allocation for everyone else.

How is a Roth IRA different from cash in terms of valuation?

Cash is taxed when it earns returns. A Roth IRA holds after-tax dollars that grow and distribute tax-free, making it worth more than the equivalent face value in cash — especially for beneficiaries with high income and long investment horizons. The premium reflects that advantage. A 12% baseline covers most scenarios; higher premiums apply when both expected returns and tax exposure are elevated.

What if the beneficiary plans to liquidate the IRA immediately?

That changes the math substantially. If the IRA will be liquidated quickly, the tax benefit is mostly lost — the full balance becomes taxable income in a short period, often at an unfavorable rate. In that case, a lower premium on a Roth (1–2%) or a higher discount on a traditional IRA is appropriate. The bid adjustment should reflect the realistic plan for the account, not an optimistic assumption about long-term deferral.

Can Celestial Divide split an IRA across multiple beneficiaries?

The platform can assign a percentage of an IRA to multiple beneficiaries, but the goal is typically whole-account assignment. Assigning 100% of a specific IRA to one beneficiary is cleaner from an estate planning standpoint, allows for matching the beneficiary designation to the allocation outcome, and avoids the administrative complexity of managing a shared inherited IRA. Use other assets to balance the overall split.

Celestial Divide is estate asset division software built for professionals. It helps executors, estate attorneys, trust officers, and family law practitioners manage asset allocation, document every decision, and produce defensible outcomes — without spreadsheets or manual negotiation.