Part One of IRA Beneficiary Planning

At the death of an IRA holder, the beneficiary has two options; one involves a spousal roll-over, if there is indeed a spouse; the other would be for non-spouse beneficiaries.

With a spouse, the IRA can essentially be transferred by the surviving spouse into his or her own personal IRA.  This is especially attractive if the surviving spouse is close to the same age.  With that roll-over, the spouse then can wait until their age of 70 ½ before required distributions have to begin. Those distributions are then recalculated every year and then at their death, children can receive benefits over their respective lifetimes.

For a beneficiary that is not a spouse, the IRA becomes an inherited IRA.  With that designation, a new account needs to be set up with a name of the deceased owner for the benefit of the new named beneficiary. This needs to be filed with the IRA custodian.

With an inherited IRA acquired before the original holder turned 70 ½, the required distributions need to begin immediately and will be based on the age of the beneficiary.  For younger inheritors, those annual amounts are small and allow for the continued tax deferred build-up of the funds. If that beneficiary dies during the time of their previously calculated life expectancy, their child or children can assume the remaining number of years of payout.

With a spousal IRA (roll-over), contributions can continue.  With an inherited IRA, the fund account is frozen but can be taken in a lump sum with resulting income taxes in lieu of the stretch payments. Regardless though, a considerable amount of wealth might be preserved due to the tax deferral as would pertain not only to the first beneficiary but also to their children.

The key to having IRA flexibility is to make sure you have your primary and contingent beneficiaries on file.  This would be specific to the names and instructions and how the account will be divided between children so that each child can use their own respective age.  In the absence of this separation, the age will be determined by the oldest beneficiary. All readers should review their current designations so that this documentation is in place. 

IRA planning is one of the most important planning decisions due to the wealth is maintained in these accounts.  A majority of these fund accounts have come from roll-overs from employer pension and 401(k) programs.  With the IRA, the participant know has the flexibility in terms of management and income planning that may not have been available in the employer plan.  With that flexibility though, there are responsibilities and opportunities to provide for long term income planning.  With the proper understanding of beneficiary planning, increased opportunities exist for your personal lifetime and legacy planning.