Money Matters

Money Matters: Rules to know before naming IRA beneficiaries

CorrespondentMay 17, 2014 

Q. In addition to other assets, I have a rather large IRA (over $3 million in value) and want to name several beneficiaries, including my very young wife, other relatives and some of my favorite charities. My thoughts are to name my wife as 50 percent, name the charities and then my estate as beneficiaries. My other relatives are listed in my will as getting a portion of my IRA. I prepared the will myself using some stuff off the Internet, and I think it is pretty airtight. The only two things I’m really worried about are: 1) the possibility of my wife not being able to access the IRA funds without penalty should I die sooner than later and she is younger than 59 1/2; and 2) the ability of the other relatives to make a stretch IRA from their portion. What if anything do I need to do differently to eliminate my concerns?

A. So, you have assets plus an IRA worth over $3 million and you are too cheap to pay an attorney to help you with your will; makes perfect sense. In this age of Internet information, I know it’s tempting to think you can do everything on your own and save money, but it is one thing to get free tips on fishing techniques or watch do-it-yourself oil change videos and quite another to do your own estate planning. I’ll explain the different rules concerning inheriting an IRA account, which may be helpful to you and others, and then I suggest you hire an estate planning attorney.

Spouses have several options when inheriting an IRA. They may leave the IRA as is and designate themselves as the owner; they may roll it into their own IRA; if the plan allows, they may roll it into a qualified employer plan; or they may elect to treat the inherited IRA as a beneficiary IRA. Spouses who are not the sole beneficiary will not be able to designate themselves as owners and should roll their portion into their own IRA. Spouses who are younger than 59 1/2 and think they may need access to the funds in the IRA, should not roll the funds to their own IRA and should establish a beneficiary IRA. Distributions from a beneficiary IRA are required and are exempt from the 10 percent early withdrawal penalty.

A nonspouse may not treat the IRA as their own. A nonspouse can’t contribute to the IRA or make any rollovers into or out of the IRA. The IRA should be set up as a beneficiary IRA. If there are multiple beneficiaries and the deceased IRA owner was younger than 70 1/2, it makes the most sense for each beneficiary to set up their own IRA.

If the IRA is not split into multiple accounts, the required minimum distribution (RMD) is based on the life expectancy of the oldest beneficiary. If the IRA is split into separate accounts for each beneficiary, the RMD will be based on the life expectancy of the individual owner.

RMDs must be made by Dec. 31 of the year after the deceased IRA owner’s death. Inherited IRAs will be titled as “beneficiary name” beneficiary IRA of “deceased name” IRA. If the deceased IRA owner was 70 1/2 or older, the assets are still titled as a beneficiary IRA, but the assets have to be distributed over a period not longer than the beneficiary’s life expectancy or the deceased’s life expectancy. So, if the deceased is older than the beneficiary, the deceased’s life expectancy must be used. Also, if the deceased has not met their RMD during the year of their death, this amount must be taken out by the end of the year by the beneficiary.

If an estate is named as beneficiary and the deceased IRA owner had reached age 70 1/2, the IRA must be distributed to beneficiaries as established by will or intestacy law at least as quickly as the decedent’s remaining RMDs. If the deceased owner had not reached age 70 1/2, the five-year rule applies, and the IRA must be distributed by Dec. 31 of the fifth year since the IRA owner’s death.

When the beneficiary is neither an individual or qualifying trust, such as a charity, and the owner dies prior to age 70 1/2, the five-year rule applies and if death occurs after age 70 1/2 the RMDs must be made using the deceased’s life expectancy. The charity pays no income tax on the distributions.

Holly Nicholson is a certified financial planner in Raleigh. She cannot answer every question. Reach her at askholly.com or P.O. Box 97128, Raleigh, NC 27624

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