Saving money in an Individual Retirement Account (IRA) is a great way create an estate for your heirs at the same time savings on taxes. The money gets to growth tax-deferred until the day you or your heirs distribute some or all of the funds. With IRA accounts, you get to name beneficiaries that will receive the account upon your demise, and the recipient has the option of deferring distributions, and taxability, of the funds for five years or potentially over their respective lifetime.

Normally you directly name the beneficiary of the account, whether one or multiple. However, you need to make sure that you in fact go through the steps of naming a person(s) to inherit the IRA account.

So, what happens if you forget? There are two possible things that will happen. One is that your IRA plan has rules that designate your spouse or family member as a default if there is no beneficiary selected. Hopefully that person(s) is alive. The more likely thing to happen is that your estate will be the default beneficiary.
If your estate inherits your IRA, your heirs will lose the option of stretching the IRA withdrawals over their lifetimes. The funds will have to be distributed within five years from the year after death. Also, the IRA account will go through the probate process where distributions may not be possible. In the worst case scenarios the distribution could be made to the estate and taxed at the nose bleed estate and trust rate of 39.6%. This is not something you want to happen. The whole reason for putting money into the account in the first place was to defer tax until your tax rate is lower.

Take the imperative steps now to make sure you have set up named beneficiaries on your IRA and tax deferred accounts. Your proactive steps may just save your heirs a huge chunk of their inheritance.

Dan Busenbark, CPA

Dan Busenbark
No Comments

Sorry, the comment form is closed at this time.