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IRA Beneficiaries, Some Answers

Naming Your Estate as an IRA Beneficiary
IRA's have become an increasingly popular method of saving for retirement. If you are the beneficiary of an IRA, you will want to immediately consult with a qualified tax and estate-planning expert to determine how you would like to receive distributions from the IRA. Several options exist for distribution of the funds depending on the age of the decedent and the named beneficiary.

In general, naming your estate as your IRA beneficiary, or allowing the IRA to pass to your estate by failing to elect an alternate beneficiary will result in the loss of many of the tax deferral options that make IRA's so attractive.

Estate Named as the IRA Beneficiary:
  • If the account holder dies before the mandatory distribution date (April 1st of the year after turning 70) federal law requires that the estate withdraw all funds from the IRA by December 31st of the 5th year following death.

    The estate can make one large distribution or smaller ones over the course of 5 years. In general, waiting until the end of the 5 year term allows the greatest accumulation of tax free growth, but also requires the beneficiaries of the estate to realize greater income all at once upon liquidation.
  • If the account holder dies after the mandatory distribution date, then the estate will be required to make withdrawals over the remaining term selected by the decedent.
Options for Spouses names as an IRA beneficiary:
  • Treat the IRA as your own by designating yourself as the account owner
  • Treat the IRA as your own by rolling the funds over into your own IRA
  • Treat yourself as the beneficiary rather than as the owner
The IRS will consider you to have treated the IRA as your own if you either make contributions to the inherited IRA or you fail to take the required minimum distributions for an entire year. This determination will be made only if you are the sole beneficiary of the IRA and you have an unlimited right to withdraw from it. For more information on the treatment of IRA beneficiaries, see IRS Publication 590.

Non-Spouse Beneficiaries of an IRA:
  • If the IRA owner dies after beginning to make mandatory distributions, you generally must receive the money at least as quickly as the original beneficiary would have.
  • If the IRA owner dies before the mandatory distribution date, you have the option to elect to receive the distributions over your own life expectancy. This can provide great tax savings and significant tax-free growth.

    You must make this election within one year or be subject to the 5-year distribution rule that an estate is subject to as an IRA beneficiary.
  • One option not available to non-spouse beneficiaries of an IRA is the roll the IRA into their own.
Consultation with an estate-planning expert is the best option to receive more information on how to best distribute an IRA. If you are planning your estate, naming your estate as the beneficiary of your IRA is not your best option. Consult with an expert such as Cheadle Law at 949.553.1066 and determine which option is best for you and your beneficiaries.

A review of any materials on this web page, any preliminary comments or an introductory meeting does not constitute legal, income tax or accounting advice upon which reliance can be placed. The attorney client relationship can only be created by a written retainer agreement following a check of potential and actual conflicts of interest with other clients.
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