In a traditional IRA, the funds contributed grow tax deferred and are taxed at ordinary income tax rates upon withdrawal after age 59 ˝. In a Roth IRA, after tax money is contributed and can be withdrawn tax free after age 59 ˝, provided certain conditions are met. There are important differences between a traditional IRA and a Roth IRA when it comes to estate planning.With a traditional IRA, you must begin withdrawing required minimum distributions or RMD's, after reaching the age set by applicable federal law. With a Roth IRA, you are not required to withdraw any funds regardless of age. For those seeking to accumulate wealth in an IRA and pass it on to their heirs, a Roth IRA offers significant advantages.
Funds in an IRA with a named beneficiary do not pass through probate upon the owner’s death. If you name beneficiaries on your IRA, the IRA will pass directly to the named beneficiaries upon your death.It is generally not a good idea to name your estate as the beneficiary of your IRA. If you name your estate as the beneficiary, it will subject the funds in your IRA to probate and creditors claims. When deciding whether to name your spouse as beneficiary or a nonspousal beneficiary, it’s important to consider the size of the IRA, the time period in which the beneficiary would be required to withdraw the funds, and the income tax ramifications. Consult a financial planner or estate planning attorney for assistance naming beneficiaries in a way that will achieve your estate planning and tax objectives.
How to Name IRA Beneficiaries
In addition to naming primary beneficiaries on your IRA’s and other retirement accounts, it’s very important to name contingent beneficiaries. A contingent beneficiary will receive the proceeds of the IRA if for any reason your primary beneficiary cannot inherit the IRA or chooses to disclaim it. If you fail to name a contingent beneficiary on all your retirement accounts, you risk having your retirement accounts end up in your estate and subject to probate.
Whether you are making your estate plan or updating it, it’s a good idea to make a list of all IRA’s and other retirement accounts. Use our free estate planning worksheet to organize this information. Then review your account information and paperwork to ensure you have primary and contingent beneficiary designations on each account that are consistent with your estate plan. If you need assistance adding beneficiary designations to your IRA, call the financial institution that holds the IRA or visit their web site for instructions.
If You Inherit an IRA
If you recently inherited an IRA, see Inherited IRA's for informaton you need to make a decision about how to handle the inherited funds.
Deadline to Contribute to an IRA
If you want to make a contribution to your IRA for the 2019 tax year, you will need to get your contribution deposited before the deadline of April 15, 2020. Also, when making your IRA contribution, you need to designate the tax year to which the contribution should be applied. For example, you will need to indicate whether your IRA contribution is for the 2019 or 2020 tax year.
What is a Stretch IRA?
A stretch IRA is not a special type of individual retirement account or IRA. Rather, a stretch IRA refers to an estate planning strategy that was designed to keep the original IRA owner’s funds invested in the IRA and growing tax deferred for as long as the law allowed, thus reducing income taxes and the amount of required distributions from the IRA. The goal of the stretch IRA concept was to stretch out distributions from the original owner’s IRA funds over one or two generations. However, a new law enacted in the U.S. at the end of 2019 eliminated stretch IRA's from being used in inherited IRA's and retirement plan accounts. The Setting Every Community Up for Retirement Enhancement SECURE Act of 2019 made several changes regarding retirement accounts and IRA's, including elimination of stretch IRA's.
Naming Your Spouse As Beneficiary
The distribution rules for inheritances from an IRA are complex and vary depending on a variety of factors such as: 1. age of the IRA owner at time of death; 2. age of the beneficiary; and 3. relationship of the beneficiary to the IRA owner. Therefore, it is important to consult a tax advisor, financial planner or estate planning attorney about the distribution rules and taxes that will be applicable to any IRA funds left to your beneficiaries.
Living Trusts and IRAs
If you are considering naming your living trust as the beneficiary of your IRA, talk to an estate planning lawyer first. Because the funds in the IRA do not pass through probate if you name a beneficiary, you do not need to name your living trust as beneficiary of the IRA to avoid probate. See non-probate transfers.If you have an AB living trust with your spouse, there are some advantages and disadvantages to naming your AB living trust as beneficiary of your IRA, so consult your attorney for more information.
Charitable Donations From an IRA
If you want to donate assets to charity at your death, a traditional IRA can be an effective part of your estate plan. If you name a charitable organization as beneficiary of your traditional IRA, the charity pays no tax on withdrawals from the IRA and you reduce estate taxes that may be owed on your estate. See charitable giving. Because tax laws change frequently, consult a tax professional before making any transfer, gift or donation.
401k's and Your Estate Plan
For information on how to ensure your 401K account is left to your desired beneficiaries and incorporated into your estate plan, refer to our section on 401K's and Your Estate Plan.
INFORMATION ON THIS SITE, INCLUDING ARTICLES, ESTATE PLANNING FORMS, AND THE ESTATE PLANNING BLOG, DOES NOT CONSTITUTE LEGAL, FINANCIAL OR TAX ADVICE. Pennyborn.com is not a law firm and is not a substitute for a lawyer. Your use of this site does not create an attorney-client relationship. Information on this site is for educational purposes only and may not be accurate, complete or up to date.
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