Designating Beneficiaries & Owning an Inherited Retirement Account

retirement-beneficiary

What happens to your Retirement account if you pass away? Retirement accounts offer an advantage in the way they can be passed to your beneficiaries without a costly Trust or extensive Probate of your estate. A beneficiary designation allows you to allocate your hard earned savings to your loved ones in any manner you choose. But, there are pitfalls that should be avoided when designating beneficiaries.

  • Avoid stretch IRA confusion

When a beneficiary inherits your IRA, they get the option to 'stretch' the Required Minimum Distributions (RMD). Spousal beneficiaries are able to claim the account as their own (which completely transfers the account into their name—and their time table), take distributions based on the life table of the deceased spouse, or take a more accelerated approach. Non-spousal beneficiaries only have two options—take distributions based on the 5-year time frame (meaning the assets will have to be fully distributed within 5 years) or take distributions based on their own life expectancy (this is generally more beneficial as the tax implication can be better managed).

  • Always name a REAL person as beneficiary

If you name an Estate or a Trust as the beneficiary of your IRA, there is technically no designated beneficiary (i.e. a real person with a life expectancy). Therefore, the RMD will be accelerated for any and all beneficiaries. As an example, if the decedent had not begun their RMD, the entire IRA would have to be paid out by the end of the fifth year after the year of death (5-year rule) and could cause major tax implications. Or if the decedent had begun their RMD's, the beneficiaries would be required to take the RMD's based on the deceased IRA owner's remaining single life expectancy had they lived. This would basically ensure large distributions, causing major tax implications.

  • Avoid Ineligible Rollovers

Non-spousal Beneficiaries must maintain the inherited status of the account. If they do not, it will be deemed a withdrawal of the full balance and therefore taxable and the 'stretch' capability of the IRA is lost. If the Inherited account does need to be moved to another financial professional, be certain that this is completed using a direct rollover trustee to trustee transfer.

  • DO NOT make contributions to an Inherited IRA

Contributions to an Inherited account are not allowed (and multiple inherited accounts must be kept separate) in order to maintain their inherited status.If the beneficiary makes a contribution to an Inherited IRA, it ceases to have the inherited status and is then fully taxable.

  • Beneficiary Designations, Property Titling, Wills and Trusts
There are several ways to ensure that your wealth passes on to your heirs according to your wishes after your passing. Many of the solutions include direct naming of an individual, including beneficiary designations, titling of property, wills and trusts. When you name individuals it is important to understand all the implications for both yourself and for your beneficiaries in the future. Things to keep in mind when choosing beneficiaries are their age and maturity level, tax implications, and your beneficiaries' life circumstances. Tools which can assist you in ensuring the continuation of your wishes include contingent beneficiary designations, 'per stirpes' designations, and a pleathora of titling and trust options. Take the time to explore all your options with your Financial Planner and further protect your wealth legacy.

As always, we are here to help. Contact us today to schedule an appointment to discuss your retirement account and your beneficiary designations.
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Monday, 16 September 2019