Individual Retirement Accounts can help you leave a legacy, as well as have income in retirement.
You have an Individual Retirement Account (IRA).
What happens if you overestimated the income you would need in retirement?
Was your IRA saving a waste of time and energy?
According to a recent Oakdale Leader article titled “Leaving An IRA As An Inheritance,” proper and strategic estate planning can ensure your diligent saving will benefit those you love.
Many IRAs transfer to beneficiaries through the beneficiary designation on the account itself.
What happens if you leave this blank?
What happens if you named someone different in your will?
These can create complications and headaches for the estate and for your heirs.
If different designations are given on the beneficiary form and the will, the beneficiary designation will take supersede what is stated in the will.
This means it is important to review and update your beneficiary designations, if you get married, divorced, remarried, or have more children – of if your beneficiary dies.
There are typically special rules involving spouses and IRAs.
A surviving spouse has a few options when inheriting an IRA.
He or she can "roll" the IRA over into a new or existing IRA under his or her own name.
The benefits of this are impacted by the age of the spouse and the intended use of the money.
A surviving spouse could also convert the inherited traditional IRA into a Roth IRA.
Taxes will need to be paid at the time of conversion.
The spouse could also transfer the IRA assets into an inherited IRA.
If these seems overwhelming, fret not.
An experienced estate planning attorney will be able to explain the benefits of each option, especially as it relates to the estate plan of the surviving spouse.
You can maximize growth through naming children or grandchildren as beneficiaries.
This would require them to begin taking Required Minimum Distributions (RMDs) immediately.
While these distributions will be taxable, their RMDs will be calculated on their life expectancies as provided on a government table.
This means the distributions will be fairly small and the account assets will have ample time to grow between each RMD withdrawal.
Can you name children or grandchildren as "contingent" beneficiaries?
What would this mean?
The surviving spouse can have the first option to "disclaim" the IRA as the primary beneficiary, and only then would it pass to the contingent beneficiaries.
This seems like a lot to consider, especially since the children or grandchildren could decide to claim the full IRA share in a single lump sum.
In that case, can you just leave your IRA to your estate?
Yes, but this option is not recommended!
You will subject the IRA to accelerated distribution rules and to probate proceedings.
What if you have no family to inherit your IRA?
You can use your IRA in charitable giving.
A qualified organization could receive the benefits free from taxes and you could reduce the size of your taxable estate at the same time.
As you can see, while IRAs are beneficial for your retirement income, you must be mindful to make proper estate plans for your IRAs too.
Reference: Oakdale Leader (February 19, 2019) “Leaving An IRA As An Inheritance”