Are You Leaving Your IRA to Someone Other Than Your Spouse?
Retirement accounts deserve special attention in your estate plan. To encourage saving for retirement, IRAs and other retirement accounts allow tax-deferred growth (tax-free in the case of a Roth IRA). An IRA can be a powerful wealth building tool, also offering asset protection and other benefits.
Designated Beneficiaries
When you’re married, it is advantageous to designate your spouse as Primary Beneficiary of retirement funds. Surviving spouses who inherit IRAs may roll them into their own IRAs, allowing the funds to continue growing tax-deferred or tax-free until they’re withdrawn in retirement or after age 70½.
Beneficiaries other than your spouse, such as your children, are treated differently. If you are unmarried, or if perhaps you want to leave some IRA funds to your children – or to someone else other than your spouse, the tax benefits may be lost without careful planning.
“Inherited IRA” stretches tax benefits
To take full advantage of an IRA’s tax benefits, non-spouse beneficiaries must transfer the funds directly into an “inherited IRA.” Although the beneficiaries will have to begin taking distributions by the end of the following year, they’ll be able to stretch those distributions over their life expectancies, allowing earnings to grow tax-deferred or tax-free as long as possible.
Your children or other non-spouse beneficiaries won’t have this option, however, unless you name them as a direct Primary Beneficiary, or Secondary (Contingent) Beneficiary, of your IRA. If you leave an IRA to your estate or Trust, your children or other heirs will still receive a share of the IRA as beneficiaries of your estate, but they’ll have to withdraw the funds within five years (or, if you die after age 70½, over what would otherwise be your remaining actuarial life expectancy).
If you name multiple non-spousal beneficiaries (several children, for example), they’ll have to establish separate inherited IRA accounts by the end of the year after the year of your death in order to take distributions over their own life expectancies. If they miss the deadline, they’ll have to use the oldest beneficiary’s life expectancy.
Be aware that, unlike other IRAs, Inherited IRAs aren’t protected from creditors in bankruptcy.
Inherited IRA rules
The following special rules apply to an inherited IRA:
– The inherited IRA must be a new IRA set up for the specific purpose of receiving the inherited account.
– The inherited IRA must be specially titled, still in the deceased account owner’s name for the benefit of the beneficiary.
– No additional contributions may be made to the inherited IRA.
– No other amounts may generally be rolled into or out of the inherited IRA.
– Required minimum distributions (“RMDs”) must be made over the beneficiary’s life expectancy starting the year after the IRA owner’s death.
Please contact our office if you have questions about how to address your IRAs in your estate plan.