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Retirement Planning - Selecting Beneficiaries
Wealth Management Opportunities for Your Beneficiaries
Your IRA is designed primarily to provide you with retirement income, but it may also provide long-term financial benefits for your designated beneficiaries. Your IRA may be given a second life that provides your heirs with income and continued tax-deferred growth for an extended period—if the transfer of assets is handled properly.
Selecting Your Beneficiary
You have an unlimited number of options when it comes to naming an IRA beneficiary. You may name your spouse, children, grandchildren, other relatives, friends, trusts, charities and even your estate.*
It is important to specifically indicate in writing, with the plan administrator, who your IRA beneficiaries are. The disposition of your IRA assets generally are not controlled by your will. Below you'll find information on the necessary planning considerations when naming an IRA beneficiary.
Traditional IRA
Spousal Beneficiaries
Many IRA owners designate their spouse as their primary beneficiary. In many cases, a surviving spouse will need the IRA assets for lifetime financial support. A surviving spouse has the opportunity to roll over the inherited IRA into a Traditional IRA in his or her name and designate new beneficiaries. Withdrawals can be postponed until the surviving spouse turns age 70 ½, at which time they must begin required minimum distributions based on their own life expectancy.
Non-Spousal Beneficiaries
If you are not married, or simply choose to leave your IRA to someone other than your spouse, you may designate one or more non-spouse beneficiaries. Unfortunately, unlike a spouse, non-spouse beneficiaries are not permitted to roll over an inherited IRA into a Traditional IRA of their own. However, they may maintain in the name of the deceased a "Beneficiary IRA" (also known as a Continual or Stretch IRA) for an extended period of time. From that Beneficiary IRA, they must take annual required minimum distributions based on their own life expectancy. One benefit of the Beneficiary IRA is it allows heirs to extend the period of tax-deferred earnings on the inherited IRA assets.
Estate, Trust, or Charitable Beneficiaries
You may designate your estate, a Q-TIP or Credit Shelter Trust, a charity or any other legal entity with no life expectancy as an IRA beneficiary. The rules for establishing a trust as the beneficiary of an IRA are:
- The trust must be valid under state law;
- The trust must be irrevocable, or a revocable trust that becomes irrevocable no later than your date of death;
- The beneficiaries of the trust must be identifiable from the trust document; and
- A copy of the trust must be provided to the custodian or trustee of your IRA.
Roth IRA
One of the attractive features of a Roth IRA is that you are not required to take required minimum distributions from your account during your lifetime. After you die, your named beneficiaries must determine whether or not they are required to receive distributions based upon their life expectancy. Like a Traditional IRA, the beneficiary's choice depends on his or her relationship to the Roth IRA account owner.
Spousal Beneficiaries
If the surviving spouse is named as the beneficiary on a Roth IRA, that spouse may elect to roll the Roth IRA over to his or her own Roth IRA. The spouse would not be required to take any distributions during his or her lifetime and would be allowed to designate new beneficiaries.
Non-Spousal Beneficiaries
After the death of the surviving spouse, or in the event that the original account owner named a non-spouse beneficiary, distributions to beneficiaries must begin by December 31st of the year following death. These required minimum distributions will be income tax free at the time of withdrawal.
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