SERVING UNIQUELY SUCCESSFUL FAMILIES
IRA Beneficiary Strategies

IRA Beneficiary Strategies

What happens to your IRA when you're gone and what are the tax implications?

At Dashboard, to illustrate various planning opportunities, we often describe what happens immediately after one of our wonderful clients “Gets hit by a beer truck”. We do this to illustrate the power of thoughtful planning BEFORE a major life event.

As it relates to naming beneficiaries, there are some key concepts this helps us illustrate. Oftentimes on our clients’ IRA’s, 401k’s and Roth IRA’s, we generally recommend establishing the following beneficiary designation order: Primary – the owner’s spouse; and Contingent – either the owner’s adult children or the owner’s own trust (which then directs assets to the owner’s children after the spouse as well). This is basic and solid planning, but now let’s see what happens when the proverbial “Beer Truck” hits our IRA/401k/Roth IRA owner.

We generally recommend establishing the following beneficiary designation order: Primary – the owner’s spouse; and Contingent – either the owner’s adult children or the owner’s own trust.

Upon the death of a client, the PRIMARY beneficiary is most likely the spouse who then accepts the account as their own as desired. However, what happens in those instances where the PRIMARY beneficiary is NOT the spouse? In those instances, it is often an adult child as the named beneficiary (whether directly or via a trust). In these cases, the IRA/Roth IRA is now considered an Inherited IRA, and the new owner must begin taking required minimum distributions (RMDs) based on their own life expectancy. For Inherited IRA’s, these distributions are taxed at the new owner’s tax bracket. For Inherited Roth IRA’s, RMDs are still required and although there is no taxation, the owner loses the tax free growth on these assets.

ONE KEY PLANNING INITIATIVE is to name contingent and successor contingent beneficiaries to allow primary beneficiaries to “Disclaim” these inherited assets and move them down another generation. For Inherited IRA’s this often shifts the tax bracket down considerably, and for Inherited Roth IRA’s, this stretches the tax free growth possibilities up to 80+ years!

Feel free to call us to discuss your own personal planning opportunities (NOT JUST ON YOUR IRA’s and ROTH IRA’s BUT POSSIBLY YOUR PARENTS TOO)!!!