Part of retirement planning includes deciding who should have your account assets after you’re gone.
If you participate in an employer sponsored retirement plan, contribute to an IRA, or have rolled over retirement plan assets to an IRA, you must name a beneficiary or beneficiaries for each account. Though these assets are considered part of your estate when it’s evaluated after your death, you can’t use a will or trust to gift a tax-deferred or tax-free account to someone else.
The beneficiary or beneficiaries you name can be the same as the person or people you name to inherit your other assets, though, with one exception, they don’t have to be.
The exception is that the federal government requires you to name your spouse as primary beneficiary of your qualified employer plan unless he or she signs a notarized document that waives rights to your assets. There’s no comparable requirement for IRAs or annuities, even if the money has been rolled over from an employer plan.
If you prefer, you can leave some or all of your retirement plan assets to a qualified charitable organization or to a trust you have established.
Rolling it over
Among the primary reasons for rolling over employer plan assets to an IRA when you retire or leave your job is having greater flexibility in choosing beneficiaries and giving those beneficiaries more control over how they take money out of the account they inherit.
Getting started
Naming retirement account beneficiaries is usually a much simpler process than creating a will or trust. Usually it requires only your signature — though you’ll want to think carefully about what you want to accomplish. One thing to be prepared for is that some IRA providers require you to use their standard beneficiary designation forms and don’t let you substitute a customized form that allows you to make decisions you prefer.
That’s something to investigate before you choose a provider. Or it may become a reason to change providers as you review your estate plan. In most cases, you can name multiple beneficiaries for each retirement account. To do that, you assign a percentage of your retirement assets to each individual beneficiary you name, since it would be impossible to predict what the dollar value of your assets will be at the time of your death.
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Keep in mind, though, that when there are two or more beneficiaries, the amount of each person’s annual required minimum distribution (RMD) is determined by the age of the oldest of the beneficiaries. An alternative is to split a single IRA into as many separate IRAs as you name beneficiaries, so that each has more control over his or her RMD.
In addition to naming a primary beneficiary or beneficiaries for each account, you may want to name a contingent beneficiary. That would ensure that a person you select would inherit the plan assets if your primary beneficiary were to die before withdrawing all the assets in your account.
When things change
It’s a good idea to review the beneficiaries you’ve named for each account annually and update if you’ve changed your mind. That becomes essential after a life-changing event like getting married or divorced, having a child, or experiencing a death in the family. Otherwise you risk having the assets tied up for an extended period if there’s a legal challenge to your designations. You can make the changes to your beneficiaries at any time, at no cost. In fact, with some providers, you may be able to make the changes online.
Deciding who gets what
You may choose to leave all your retirement assets to your spouse, who has the greatest flexibility in deciding how to handle the assets, including rolling them over to an IRA in his or her own name. But if your spouse has sufficient retirement savings, you might want to consider naming your children or your younger descendants, like grandchildren or great-grandchildren. Be sure to check with your legal and tax advisers about whether you need to be concerned about the generation-skipping tax (GST), which may result in additional taxes if you leave assets to people two or more generations younger than you are.
An advantage of leaving retirement plan assets, IRAs in particular, to younger beneficiaries is that you have the unique opportunity to stretch your savings and their ability to accumulate tax-deferred earnings well beyond your lifetime. In fact, this approach is sometimes described as a stretch IRA strategy.
Taking money out
Your beneficiaries will usually have the choice of taking all the money out of your account by the end of the fifth year following the year of your death or taking annual RMDs. Rules for calculating RMDs vary depending on the identity of the beneficiary and whether or not you had already begun taking your distributions. The value of the inherited IRA at the end of the calendar year preceding the year for which the distribution must be taken is always a factor, as is a life expectancy. But whose life expectancy depends on the circumstances. Since you’ll want your beneficiaries to get it right, let them know ahead of time to consult their tax or legal adviser and read the relevant sections of IRS Publication 590, “Individual Retirement Arrangements (IRAs).”
If the inherited IRA is a traditional tax-deferred account, your beneficiary owes taxes on the RMD, figured at the same rate as tax on his or her ordinary income. If it’s a Roth IRA, the RMD is required but tax free.
You Have To Know This Before Adding Beneficiaries To Retirement Account by Inna Rosputnia
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