IRA beneficiary planning is often overlooked as a tax-saving strategy.
Failing to designate an IRA beneficiary, or choosing the wrong beneficiary, may cause unwanted tax consequences.
Beneficiaries affect the speed of distributions
Typically, at age 70 1/2 you are required to start taking distributions from your plan. April 1st, following the year in which you reach this age, is termed your required beginning date (RBD).
The designation of your beneficiary will affect the speed at which you will be required to take these distributions and how they will be treated at your death. Depending upon your personal financial planning, it is generally most advantageous to keep the tax-deferral aspect of your retirement plan going for as long as possible.
If you die without having named a beneficiary, the distributions and income taxes are generally accelerated.
Dying before and after your RBD
Should you die prior to your RBD, the entire retirement plan account becomes a part of your estate and must be distributed to your heirs by the end of the fifth year following the year of your death.
If you die after your RBD, the plan must be distributed at least as quickly as it would have if you were alive – based upon life expectancy tables.
Naming a beneficiary stretches out the tax benefits
By naming a beneficiary, you enable your spouse or children to defer taxation of the plan distributions and stretch out the benefits of the tax-deferral aspects of your plan.
If your spouse is the beneficiary of your plan benefits, he or she can roll the funds into his or her own IRA allowing the distributions to be delayed until your spouse’s Required Beginning Date. If you name someone other than your spouse, such as a child, your beneficiary must start taking distributions, but can generally elect to do so over his or her life expectancy.
If you are planning on making a charitable bequest at your death, naming a charity as a beneficiary can be a great strategy. Since the charity is a tax-exempt organization, these distributions from your IRA avoid taxation altogether.
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