Once you turn 70 ½ years old, you must start taking out required minimum distributions from your IRA. However, if you do not withdraw all of your money from your IRA before you die, naming the right beneficiary for your IRA can keep it growing tax-deferred for decades. But who or what is the “right” beneficiary depends on your circumstances.
Essentially, your beneficiary choices are as follows:
- Your Spouse
- Most married people will choose this option in order to provide for their surviving spouse and because they can take advantage of the spousal rollover option.
- The spousal rollover option allows the surviving spouse to “roll over” your IRA into their own IRA, allowing them to further delay income taxes until they have to start taking required minimum distributions.
- When your spouse does the “roll over” they will then name a new beneficiary, such as your children or grandchildren. When your spouse dies the new beneficiary’s life expectancy will be used for the remaining required minimum distributions.
- Children, Grandchildren, Other Individuals
- If you are not married, or your spouse will have other sufficient assets after you die, naming your children, grandchildren, or other individuals could be the best option.
- Distributions will be paid based on your beneficiary’s life expectancy after you die, providing for tax-deferred growth.
- Naming children, grandchildren, or other individuals may not be right for you, if you are concerned about losing control over the money. The beneficiary can do whatever they want with the money, including cashing out the entire account. The money could also be available to the beneficiary’s creditors or spouse. If these are concerns, you may want to name a trust as the beneficiary.
- A Trust
- Designating a trust as the beneficiary of your IRA provides you with control after you die.
- The required distributions, based on the life expectancy of the oldest beneficiary of the trust, are paid to the trust, which contains your written instructions regarding who will receive the money and when.
- You can provide for periodic distributions to your children or grandchildren, protecting the remainder from irresponsible spending.
- One disadvantage is that you will not be able to provide for your spouse and stretch out the tax-deferred grown beyond your spouse’s actual life expectancy. This is because, again, you must use the life expectancy of the oldest beneficiary of the trust to determine the required minimum distribution, which, in this case, would most likely be your spouse.
- Another disadvantage is that income tax rates for trusts will often be a higher rate than for your individual beneficiaries. However, if the trustee distributes the distributions that are paid to your trust to the beneficiaries of the trust, the beneficiaries of the trust can pay the income taxes at their own rates.
- Finally, in order to work effectively, your trust must meet complex IRS requirements. This usually involves creating a Stand-Alone Retirement Trust.
For more information, contact Estate Planning attorney, Jeffrey M. Black, at (616) 458-3994 or email email@example.com.