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According to Boston College’s Center on Wealth and Philanthropy, baby boomers alone are positioned to inherit more than $7.2 trillion from assets in retirement accounts. Getting assets transferred after the death of the original IRA owner involves several issues that could affect the beneficiary’s tax liability. Therefore, it is wise to involve your beneficiaries in the planning process.
When you inherit an IRA, choices on how to handle the transfer are based on the type of IRA (Traditional or Roth), the relationship of the beneficiary to the deceased (spouse, non-spouse, trust, estate, charity), and the age of the original account holder at the time of death.
For example, a traditional IRA with a spouse designated as sole beneficiary, can transfer assets into the spouse’s own existing or new IRA after taking the required minimum distribution for the year of death, if the original account holder was over age 70 ½ at the time of death and did not previously take the distribution. In the case of multiple primary beneficiaries, assets must be transferred into separate Inherited IRAs.
Non-spouse beneficiaries have fewer options. Most significantly, they are not allowed to transfer the assets into their own IRA account. Non-spouse beneficiaries are required to transfer assets into an Inherited (five years or life expectancy) IRA and taxable distributions must begin within a certain amount of time. Check with your financial advisor for details.
When a trust is the beneficiary, it must be irrevocable; it must name identifiable beneficiaries; it must be valid under state law; and the custodian must have a certified copy of the trust. When an estate is the beneficiary, the executor can take a taxable lump sum distribution or open Inherited IRAs depending on the age of the original account holder.
Any beneficiary may also elect to take a lump sum distribution. However, while there is no 10% early withdrawal penalty, the beneficiary will need to pay income taxes on the distribution.
New wealth presents new opportunities and with any inheritance, it is likely that a beneficiary will want to reassess their total investment strategy. A meeting between the account holder, beneficiary, and financial advisor can avoid costly mistakes. Discuss what options are available to the beneficiary for taking the proceeds of the assets when the account holder dies as well as the tax and investment implications of each. Also, consider naming contingent beneficiaries in case the primary beneficiary is no longer alive when the account holder dies. These assets go to the beneficiary automatically instead of through the probate process. Beneficiary designation forms typically override a will therefore it is very important to keep beneficiary information up to date.
These are only some of the issues involved in beneficiary designations. Please contact your investment advisor or give us a call with any retirement planning questions.