Often times when people pass away they still have a significant amount of money sitting in their individual retirement accounts for a beneficiary to inherit. But here’s the question…should it go to the same person you designated when you first signed up for it or should it go to someone else? It is important to decide who that beneficiary will be, such that it fits into your overall estate plan.
An IRA (and the designated beneficiary) can be used to balance out other bequests and to enhance other estate planning goals. Depending on what you decide, there are a variety of tax implications, which Morningstar recently discussed in "Who Should Inherit Your IRA?"
To make this a bit easier to get your arms around, let’s take a look at some of the options you might have when it comes to designating a beneficiary for your IRA account(s)…
- Spouse – If your spouse is the beneficiary, he or she can roll your IRA into their own. However, it might not make sense to designate a spouse if they are nearing the age of having to take required minimum distributions and will not need the money.
- Child or Grandchild – If they inherit the IRA, then they can stretch the benefits out over their own lifetimes. However, as a practical matter, few do so because they need the money.
- Charity – Your estate can get a tax deduction if you leave your IRA to a charity. This takes some special planning so make sure you get some expert advice before filling out a beneficiary designation form.
- Your overall Estate – There is not much benefit to naming your estate as the beneficiary. However, if you cannot decide on another option, at least it’s a place to put it that can be distributed through the estate at a later date.
- A Specific Trust – Ordinarily, there is no benefit to leaving your IRA to a trust. However, if the beneficiary would otherwise be a minor child or someone unable to manage their finances, it might be a possible option to consider.