When you first became eligible to participate in your employer’s retirement plan, you were asked to complete beneficiary information. When you open an IRA, establish a bank account, buy insurance, you are faced with who is the beneficiary. While this choice may seem straightforward, there are complexities to IRA beneficiary designations and implications to your estate planning.
Selecting an IRA beneficiary establishes who inherits the remaining balance of your account upon your death and how they can access it. It’s important to periodically review and update your beneficiary designations to ensure they remain appropriate through the changes in your financial and family circumstances.
For instance, if you initially named your spouse as the beneficiary but later divorced, your ex-spouse would still inherit the IRA assets unless you revise the beneficiary designation with your custodian.
Some question whether to designate a trust as an IRA beneficiary. While putting the IRA in a trust doesn’t offer tax advantages, it may serve non-tax-related purposes, such as controlling access to funds. However, if the trust doesn’t allow distributions to beneficiaries, the IRA’s required minimum distributions (RMDs) could be taxed at the trust level, subject to a higher tax rate.
Distributions from traditional IRAs, whether to the original owner or beneficiaries, are taxable. Once the original owner reaches the age for mandatory distributions, typically 73, beneficiaries face complex distribution rules.
Inherited IRA rules have changed with the passing of the SECURE Act 2.0. Surviving spouses have several options, including treating the IRA as their own, rolling it over into their IRA, or electing to be the beneficiary. Specific rules apply, such as the surviving spouse’s age and their right to withdraw funds.
Non-spousal beneficiaries face stricter distribution rules, typically involving the “10-year rule” or lifetime payouts, depending on their relationship with the account owner and other factors like age and disability.
Certain beneficiaries, like surviving spouses, siblings within ten years of age, or disabled individuals, may qualify for more flexible distribution options. These eligible designated beneficiaries can opt for lifetime distributions or lump sum payments.
To guarantee that your IRA passes to your chosen beneficiary, regularly review and update your beneficiary designation forms with your custodian. Without a designated beneficiary, the IRA might default to your estate or a living person according to the custodian’s policy.
As far as estate planning, naming beneficiaries is a simple way to pass on these assets and ensure your wishes upon death are met. The IRAs will pass to the beneficiaries outside of probate. Thus, are not included in the estate at death.
Given the intricate tax and distribution rules surrounding IRA beneficiary designations, consulting with a financial advisor or tax professional can offer guidance tailored to your specific circumstances. Rose Group CPAs are here to help you ensure your financial affairs are in order.
