Learn How to Name an IRA Beneficiary

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It seems easy: just pick who you want to inherit the money in your IRA and list them as the IRA beneficiary. It doesn’t seem like a topic deserving of its own article. But your family could end up losing a substantial amount of money if you designate the wrong beneficiary. Beneficiary designation is an often overlooked part of estate planning but one with significant consequences.

The crux of IRA beneficiary concerns center around “mandatory distributions.” This is money that must be taken out of the IRA at certain time periods based on certain circumstances (beneficiary’s age chief among them).  Here are some big picture pointers based on the particular type of beneficiary you want to receive your IRA assets:

If you are leaving the assets to your spouse:  

Your spouse has choices and which choice they make can make a big difference. If they have their own IRA they can put your assets into their IRA. They can also setup an inherited IRA. The life expectancy of your surviving spouse will be used in calculated mandatory distributions.

If you are leaving the assets to your children:  

There is a benefit in leaving assets to children: they are young and therefore have a longer life expectancy than a spouse. Therefore mandatory distributions can be stretched out over a longer period of time. This allows more time for the money in the IRA to grow and the dollars really add up over time.

If you are leaving the assets to a trust:

It is true that a trust can receive the assets in your IRA upon your death but it is a complex topic beyond the scope of this article. Speak with your estate planning professional if this is something you are considering.

Providing your spouse with flexibility:

It sometimes makes sense for your spouse to disclaim the assets in your IRA. Why would someone disclaim money you might be asking? As the size of your estate grows some complex tax planning considerations arise including the use of a disclaimer. For these purposes you’ll want to make sure that you name not just a primary beneficiary of your IRA but a secondary beneficiary as well.

If you have any questions about how best to structure the designation of your IRA beneficiary, retirement account, or life insurance proceeds, or have other estate planning concerns, give us a call at (646) 736-7539, mention this article, and save $750 on a Family Wealth Planning Session.