Your IRA may well turn out to be your legacy to someone.
Generally, qualified plans and IRAs go to their designated beneficiaries
immediately at your death so they avoid probate. But you should keep
your beneficiaries updated and understand how they'll receive your
legacy.
-No IRA beneficiary designated:
Most importantly, be sure you designate a beneficiary for you IRA or other qualified plan. You designate the beneficiary right on the IRA or qualified plan form. If you don't then your estate becomes your beneficiary. What's bad about that is:
1. your IRA assets must then go through probate as well as be subject to estate taxes, and
2. your beneficiaries (excluding your spouse) must distribute your IRA within 5 years of your death.
Probate not only adds fees but delays use of your IRA. Your IRA proceeds will also be distributed according to your will or intestate laws.
Distribution of your IRA contents - to whoever the court decides - within 5 years of your death defeats the tax-deferred (deductible IRAs) or tax-free (Roth IRAs) growth benefits that extended - based on beneficiary life expectancy - distribution times can produce.
-Spousal beneficiary designated:
IRS rules allow the designated surviving spouse to either:
* rollover your IRA into her own IRA so she becomes the new owner of your IRA, or
* be treated as a spousal beneficiary of her husband's IRA and thus keep it in your name IRA with her simply designated as 'beneficiary of your IRA account'
Which option to choose determines when the surviving spouse must begin her Minimum Required Distributions (MRDs).
If she chooses to be the new owner, she can wait until turning 701/2 to begin her MRDs and still contribute more to it too until she reaches 701/2. Choosing to remain designated on the account as spousal beneficiary requires her to begin making MRDs the year after you would have turned 701/2. She also can't contribute more to it as a beneficiary.
-Nonspouse beneficiary designated:
If you designate a nonspousal beneficiary - such as a son or daughter - he remains as a designated beneficiary on your IRA account; he cannot treat it as his own IRA as the spouse can. He can't contribute more to it, but he can choose to take distributions from it based on his life expectancy. His relatively longer life expectancy creates very small MRDs in the early years. That may allow the IRA to grow considerably.
-Designate contingent beneficiaries and keep updated:
It's a good idea to maintain a contingent beneficiary in case your first choice dies prematurely. It's typical to designate a child as a contingent beneficiary to a spouse.
And update all beneficiaries when you life situation changes. If your intended IRA beneficiary changes, you must make the change on your IRA document or it doesn't change.
-No IRA beneficiary designated:
Most importantly, be sure you designate a beneficiary for you IRA or other qualified plan. You designate the beneficiary right on the IRA or qualified plan form. If you don't then your estate becomes your beneficiary. What's bad about that is:
1. your IRA assets must then go through probate as well as be subject to estate taxes, and
2. your beneficiaries (excluding your spouse) must distribute your IRA within 5 years of your death.
Probate not only adds fees but delays use of your IRA. Your IRA proceeds will also be distributed according to your will or intestate laws.
Distribution of your IRA contents - to whoever the court decides - within 5 years of your death defeats the tax-deferred (deductible IRAs) or tax-free (Roth IRAs) growth benefits that extended - based on beneficiary life expectancy - distribution times can produce.
-Spousal beneficiary designated:
IRS rules allow the designated surviving spouse to either:
* rollover your IRA into her own IRA so she becomes the new owner of your IRA, or
* be treated as a spousal beneficiary of her husband's IRA and thus keep it in your name IRA with her simply designated as 'beneficiary of your IRA account'
Which option to choose determines when the surviving spouse must begin her Minimum Required Distributions (MRDs).
If she chooses to be the new owner, she can wait until turning 701/2 to begin her MRDs and still contribute more to it too until she reaches 701/2. Choosing to remain designated on the account as spousal beneficiary requires her to begin making MRDs the year after you would have turned 701/2. She also can't contribute more to it as a beneficiary.
-Nonspouse beneficiary designated:
If you designate a nonspousal beneficiary - such as a son or daughter - he remains as a designated beneficiary on your IRA account; he cannot treat it as his own IRA as the spouse can. He can't contribute more to it, but he can choose to take distributions from it based on his life expectancy. His relatively longer life expectancy creates very small MRDs in the early years. That may allow the IRA to grow considerably.
-Designate contingent beneficiaries and keep updated:
It's a good idea to maintain a contingent beneficiary in case your first choice dies prematurely. It's typical to designate a child as a contingent beneficiary to a spouse.
And update all beneficiaries when you life situation changes. If your intended IRA beneficiary changes, you must make the change on your IRA document or it doesn't change.
