Individual Retirement Accounts – for many Americans, they are the main savings vehicle for retirement. As familiar as everyone is with IRAs, many people have lost sight of a very important aspect of these accounts. Like insurance proceeds, IRA balances do not pass to your heirs according to your will. Rather, these vehicles require you to name a beneficiary to receive the proceeds at your death.
Do you know who your beneficiaries are?
You may think so, but does the bank, brokerage or mutual fund firm have the same person listed in their paperwork? Sounds simple, but many of these accounts have been around for a decade or more, and you may have persons listed who have predeceased you. Also, the custodian for your IRA must be able to locate your beneficiary designation in order to honor it. Now is a good time to ask your IRA custodians for a copy of the beneficiary designation on file, particularly if your custodian is a financial institution or insurance company that has been sold or merged several times over the years.
Defer that Tax Bill!
Another important reason to have up-to-date beneficiary designations has to do with tax deferral. IRAs provide an excellent opportunity to save money without having to pay taxes on dividends and capital gains until they are withdrawn, when all withdrawals are taxed as ordinary income. Therefore, withdrawals are usually postponed as long as possible, until needed or when required at age 70 1/2.
Having Your Cake and Not Letting the Tax Man Eat It!
If you pass away while there are still balances in your IRA account but no living beneficiary, IRS rules can force your heirs to withdrawal all of the money in the account within five years or less. These withdrawals will be taxable income to your heirs, just as they would have been to you, the account owner! Heir, beware! For a sizable IRA, that can mean a whopper of a tax bill! Properly structured beneficiary arrangements can give your heirs the flexibility to stretch out these withdrawals over their lifetime.
Plan for Contingencies Too.
Be sure to name contingent beneficiaries as well. They will receive your IRA account if your primary beneficiary, or beneficiaries, are no longer able or willing to receive it. Also, new IRS rules now allow your contingent beneficiaries (i.e. kids) to continue the distributions after the death of your primary beneficiary (i.e. spouse).
Be Sure Your Ducks Are in a Row!
All beneficiary changes should be reviewed with your estate planning attorney or advisor to be sure they fit with your overall estate plans. Now more than ever, you can leave your heirs better provided for through a little careful beneficiary planning now.
