Why Designating a Beneficiary for Your IRA is Important

2:13 pm Uncategorized

Most estate plans include a variety of assets: investment accounts, bank accounts, property, life insurance and IRAs or other retirement accounts.  Many people may consider IRAs to be among the least of those assets because they intend to deplete their IRAs during their lifetime.  But if someone dies with a substantial amount still in an IRA, it can become a major inheritable asset if the right steps are taken to protect it.

And the most important step is to designate beneficiaries for your IRAs.  Because if you don’t name a beneficiary – or if you name your estate as the beneficiary – you may have made a big mistake that could cost your heirs a huge tax saving.

Here are the rules on inherited IRAs:

A spouse can roll over an inherited IRA as he or she wishes.

Any other heir must separate an inherited IRA from their own retirement funds and must start taking withdrawals right away, no matter what age they are at the time they inherit.  These distributions do not suffer a 10% withdrawal penalty, but they do count as taxable income.

Here’s the important part about naming a beneficiary: if your heir is named, they can spread the withdrawals over their lifetime.  If not, they have to take it all within five years.  Which can put them in a higher tax bracket and cut the growth of the inherited IRA.

Taking a few minutes to fill out a beneficiary designation form for each of your IRAs is a small price to pay so your heirs don’t have a big price to pay later.

Taking some time to speak with a California estate planning attorney is also a small price to pay for protecting your assets properly.

Get started by contacting our Orange County asset protection estate planning law firm as soon as possible.

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