Naming a beneficiary for your IRA is an important step in your financial and estate plans. It ensures that the wealth you’ve built up over the years is passed on to the person or entity you choose. This decision, however, should be made carefully, as the rules can be complex, and mistakes can be costly.
At Advance Capital Management, our financial advisers work closely with clients to ensure that every detail is addressed. We help you understand the intricacies of the rules, avoid common pitfalls and make informed decisions. Our goal is to ensure that all your t’s are crossed and i’s are dotted, providing peace of mind that your assets will be distributed according to your wishes.
Understanding the various aspects of inherited IRAs and the options available to different beneficiaries is a good place to start. So, let’s break down the specifics to help you make the best decision.
What is an Inherited IRA?
An inherited IRA, or beneficiary IRA, is an account that a beneficiary opens when they inherit an IRA or employer-sponsored retirement plan after the original owner dies. This can include traditional, Roth, SEP and SIMPLE IRAs.
Once the original owner passes away, the assets must be transferred to a new account in the beneficiary’s name. Learn more about implementing an inherited IRA into your own retirement plan here.
Understanding Beneficiary Options and RMDs
The rules for handling an inherited IRA vary depending on the beneficiary. Typically, surviving spouses have the most options.
However, all beneficiaries must adhere to the IRS’s required minimum distributions (RMDs). Starting at age 73, account holders must withdraw a minimum amount each year, which becomes part of their taxable income. Roth account owners are exempt from this rule, but for non-Roth account holders, whether the original owner began taking RMDs before their death will largely impact the beneficiary.
Spouses: They have the most flexibility. They can:
- Leave it as an inherited account and decide how to take distributions.
- Delay distributions until the original owner would have reached RMD age.
- Take distributions based on their own life expectancy.
- Roll the inherited account into their own IRA, claiming new ownership.
Non-Spouses: They have more restrictions. They can:
- Take distributions over the longer of their own life expectancy or the original owner’s remaining life expectancy.
- Follow the 10-year rule if the account owner died before starting RMDs.
Read this article to take a deeper dive into the inherited IRA rules for non-spouses.
The 10-Year Rule
Under the SECURE Act, beneficiaries must distribute the entire balance of an inherited IRA by the end of the 10th year following the original account owner’s death. This applies to most beneficiaries unless the original owner died before January 1, 2021. These distributions are taxable, except for already-taxed portions or qualified distributions from Roth accounts.
Make Sure Your Estate Plan Reflects Your Wishes
Regardless of who you choose to name as your beneficiaries, — spouse, child, charity, etc. – it’s important to ensure your estate plan clearly states your wishes, especially in complex family situations, like divorce or remarriage.
Naming a trust as the beneficiary can prevent conflicts and ensure all heirs are accounted for. This is a good reminder to keep your IRA beneficiaries updated, as they override your will.
Bottom Line
Naming beneficiaries is essential for your retirement accounts. The IRS has specific rules depending on who you name. Incorrectly naming a beneficiary can lead to costly and chaotic outcomes.
Before naming a beneficiary, consider consulting a financial adviser or estate planning attorney. They can help evaluate your circumstances and guide you to the best decision for you and your family.
For more personalized advice, contact one of our financial advisers at Advance Capital Management. We are here to help you navigate these important decisions as you plan your financial legacy.
You can also get ahead with your plans by downloading our free Guide to Inherited Retirement Accounts today!
Advance Capital Management is a fee-only RIA serving clients across the country. The Advance Capital Team includes financial advisers, investment managers, client service professionals and more — all dedicated to helping people pursue their financial goals.
