Dollars & Sense - Naming an IRA Beneficiary

Deciding whom to name as your IRA beneficiary can be fraught with land mines, particularly if you want to stretch out the IRA into future generations. Failing to name a beneficiary is the worst mistake you could make with an IRA. If you die without naming a beneficiary, your IRA will go through the costly and time-consuming probate process. Naming a beneficiary can allow you to take smaller Required Minimum Distributions from your IRA since the withdrawal amount can be over two life expectancies rather than just your own. If you’re married, naming your spouse as your IRA beneficiary makes sense since upon your death your spouse can receive your IRA account free of estate taxes and roll it into her or his name without having to immediately pay income taxes. A spouse can delay taking distributions from an inherited IRA until age 70 ½. In cases where the spouse is older than the owner of the IRA, the spouse may decide not to roll it over. That way they can delay taking the Required Minimum Distributions until the deceased would have reached age 70 ½. If children are named as beneficiaries of your IRA, they don’t have the luxury of rolling it over. If you’ve started to take distributions a non-spouse can continue them at the same rate. If not, they can start taking withdrawals over their own life expectancy provided the choice is made before the end of the year following your death. Otherwise the balance has to come out within five years. Trusts and charities can also be named as beneficiaries.

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