Planning for the future is never easy. There is no telling what might happen to you at any point in time, especially later in life. That is why you should consider all the options you have now with the help of an estate planning attorney. If you have an IRA or 401k, it is important to know how to choose the right beneficiary so that it doesn’t conflict with your Estate Plan.
Using Money from a Retirement Account
You are required to take money from a retirement account, such as an IRA, when you reach a certain age. For example, the law now states that after you turn 73, you must begin withdrawing money from your IRA. However, you do not have to empty your entire account at that time. Instead, there are regulations as to the minimum amount you must withdraw each year (these are called Required Minimum Distributions, or RMDs). If there are assets in the account upon your death, you can leave them to a named beneficiary or beneficiaries.
Naming a Beneficiary
There are several options for you to name as a beneficiary when doing IRA inheritance planning. These include the following:
- Your spouse
- Your child(ren) or grandchild(ren)
- Any individual
- A trust
- A charity
You can also name any combination of the above as beneficiaries of your retirement plan.
Naming a Spouse as a Beneficiary
The majority of married people name their spouse as the beneficiary of their IRA for two main reasons: the money can be used to help the surviving spouse go on with life; and the spousal rollover option can offer more years of tax-deferred growth. The spousal rollover rule allows your surviving spouse to roll your IRA into their own IRA.
Naming a Child, Grandchild, or Other Individual as a Beneficiary
Tax-deferred growth can still occur if the beneficiary is a minor. There is a disadvantage to this option as naming one person the beneficiary can destroy the planning you performed. The individual can withdraw all of the money and spend it as he or she pleases.
Naming a Trust as a Beneficiary
Creating and naming a see-through trust as the beneficiary for your IRA is an option for those who want to have total control over tax-deferred money after death. The reason for this is that all of the proceeds of the IRA will be paid into a trust that has explicit instructions as to how the money is to be used and by whom. The proceeds of the IRA are not paid directly to an individual when a trust is named as the beneficiary. It is important to use a qualified estate planning attorney to ensure the trust is written correctly in order to minimize the income tax ramifications associated with leaving an IRA to a trust.
Naming a Charity as a Beneficiary
Should you wish to leave money to a charity when you die, leaving proceeds from an IRA is a good option for multiple reasons. One such reason is that the charity will receive the money without paying income taxes on it since charities do not pay income taxes. Another reason is that the IRA will not be included in your estate for estate tax purposes.
