Beneficiaries Tips

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Accounting Methods For IRA Beneficiaries

If you have multiple beneficiaries for your IRA account, you can spare them from imminent hassle by establishing a separate account for each beneficiary. Many multiple IRA beneficiaries elect to use the life expectancy option, in which case distributions are allotted according to the life expectancy of the oldest beneficiary. Take the case of Ralph, age 63, Ellen, 45, and Richard, 25. Without separate accounting, all must accept the same total distribution of the oldest of the three, Ralph, whose yearly distribution amounts to $20,000. This means that Ellen and Richard will be subject to higher income tax than would be the case if their individual life expectancies were the deciding factor. With separate accounts, Ellen and Richard would have this option and pay less tax. This would give them more flexibility in financial planning and much longer periods to enjoy their IRA distributions.


IRA Distributions To Your Spouse

If you have an Individual Retirement Account (IRA), are married, and your spouse is the sole beneficiary, at your death he or she can transfer the full amount of the funds in your IRA account to his or her IRA. This will enhance the IRA funds available for his or her retirement years. Also, depending on the age of your spouse at your death, they can remain in your account and continue to earn interest until your spouse is ready or required to use them. Under federal law, your spouse has the option of waiting until he or she is 70-and-a-half years old before making use of these funds. Another option is to have the total amount of funds distributed over his or her life expectancy, as determined by current government tables. This avoids the snare of a lump sum payout which could unnecessarily create a tax burden for your beneficiary.


Discuss Options With Your IRA Custodian

If you do not discuss disposal of your IRA assets with your custodian, this may create unwanted problems for your beneficiary or beneficiaries, especially if your beneficiary is not your spouse. Left to chance, the options offered to beneficiaries may not be in accord with your wishes. For instance, custodians are not required to follow the guidelines set in IRA regulations, one of which allows beneficiaries to take distributions over their life expectancies, as determined by government tables. This method permits beneficiaries to withdraw only a certain amount each year. However, some custodians may insist on beneficiaries taking lump sum distributions, which in many cases may result in tax liabilities. To make certain that at your death all transactions involving your beneficiaries are handled according to your wishes, check things over carefully with your custodian. This is important if you want your beneficiaries to have all the options open to them.


A Non-Spouse Beneficiary

Having a Roth Individual Retirement Account (IRA) has distinct advantages to your spouse if he or she is your sole beneficiary. However, if a non-spouse is the beneficiary, he or she must take the Roth IRA distributions in one of two ways. - They must be taken in a lump sum by the end of the year which is the fifth anniversary of your death. - They must be taken in amounts determined by his or her life expectancy, according to government tables. This distribution would begin no later than December 31 of the year following your death. However, since those distributions would be treated as contributions first, it is likely that if most of the distributions were made before the end of the five-tax-year period they would not be subject to tax.


Beneficiary Trusts

If you want to make a Trust the beneficiary of your Individual Retirement Account (IRA) you'll want to make certain that it is a qualified trust so the trust can take advantage of the life expectancy option. There are four principal requirements that insure the validity of a trust. - It must be a valid trust under state law. - The trust must become irrevocable upon the death of the owner of the retirement account (you). - The beneficiaries of the trust must be clearly identifiable. - The IRA trustee or custodian of the trust must have a complete copy of the trust agreement, along with any amendments that may have been made. If all of these conditions have been met, then the life expectancy option, based on the life expectancy of the oldest beneficiary of the trust, can be used in making distributions to all of the trust beneficiaries.


Beneficiaries: Avoid IRS Penalties

If you are the beneficiary of an Individual Retirement Account (IRA) you should be alert to possible penalties that could be inflicted by the Internal Revenue Service (IRS). For example, if you are an IRA beneficiary and decide to use the Life Expectancy method for distribution of your share of the assets, your distributions must begin no later than December 31 of the year following the death of the IRA participant. If the full portion of the money due to you as of this date is not distributed to you, then you will be subject to what the IRS calls an “excess accumulation penalty.” This is quite punitive, amounting to a full 50 percent of the distribution amount. But you do have an important money-saving remedy. The penalty will be waived if the total amount of all the money due you is distributed to you by the fifth year following the death of your benefactor, in other words by using the Five Year Rule.


"Required Beginning Date"

Let's suppose that your spouse is the sole beneficiary of your IRA account and you die after the Required Beginning Date (RBD) for IRA distributions, which is currently 70.5 years. What would his or her options be? According to current regulations, your spouse would be required to distribute the remaining assets over either (1) his or her life expectancy according to government tables or (2) your remaining life expectancy at your death, again according to government tables. The deciding fact would be whichever is longer. If your spouse is younger than you are, then the life expectancy would be determined each year. If you are younger than your spouse, then at your death your life expectancy would be fixed as of that year and then be reduced by one year each subsequent year to determine how long your IRA assets would be distributed to your spouse.


Roth IRA Beneficiary

In electing to establish an Individual Retirement Account (IRA) you may choose to have a traditional IRA account or decide on a Roth IRA account, both of which are recognized by and acceptable to the Internal Revenue Service (IRS). One of the advantages in establishing a Roth IRA account is that it is not subject to the minimum distribution rules. As in a traditional IRA account, if your spouse is your sole beneficiary he or she can treat the Roth IRA as his or her own. She can ignore the distribution rules of the regular IRA account and be able to enjoy all of the normal rights and privileges inherent in a Roth IRA. In other words he or she will not be forced to “accelerate” or take income, but can elect to let it continue to earn interest until he or she needs it.


Annual Deadline for Assigning Beneficiaries

If you are considering new or additional beneficiaries for your Individual Retirement Account (IRA), it's important that you keep the annual deadline of September 30 in mind. This will be crucial in determining life expectancy factors, especially in the case of multiple beneficiaries. It will have a deciding effect on what is known as the “stretch period” for distribution of your IRA assets. For example, suppose you name two children as beneficiaries and also want to include a charity. A charity is not an individual and therefore has no life expectancy, which means that the assets for all three beneficiaries must be distributed by December 31 of the fifth year following your death. This may cause tax disadvantages for your children unless the charity agrees to distribute its portion of the assets by September 30 of the year following your death.


IRA Distributions to Multiple Beneficiaries

Recent changes in federal law have simplified the options available to beneficiaries of Individual Retirement Accounts (IRA). Among the essential considerations are whether the owner of the IRA account, referred to as the “participant,” died before the RBD or Required Beginning Date, which is currently 70.5 years. Another is the age of the oldest person among the multiple beneficiaries. If the beneficiaries agree, the inherited IRA assets can be distributed over the life expectancy of the oldest beneficiary, according to current government tables. Or the multiple beneficiaries may agree on another option, which is to have the full balance distributed in shares to all the beneficiaries, as determined by the participant, by December 31 of the fifth year following the participant's death.

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