First and foremost, it’s important to make it common practice to periodically update your estate planning documents and review beneficiaries of your retirement plans. While naming your trust or estate may seem like an easy route to take, it could cost your heirs in taxes and flexibility.
Ensuring that you’ve named specific individuals as the designated beneficiaries of your retirement accounts can prove to be a strategic move for the next generation. As you name your beneficiaries on your retirement accounts, know that you have many options—each with their own pros and cons.
Who Should I Name as My Beneficiary?
Often individuals will name their spouse as the primary beneficiary. This allows your spouse to either treat it as their own or maintain an inherited IRA upon your death. However, the planning gets more complicated when your spouse has pre-deceased you and you begin to look at options for getting your assets to the next generation.
When you name a Non-designated Beneficiary to your retirement accounts (such as your estate, a trust, or a charity), you greatly reduce the options the ultimate heir of the assets has at your death. If you had not yet begun to take your Required Minimum Distributions (RMDs), then the heir of your estate or trust must distribute all assets from the IRA within five years of your death. If you had begun your RMDs, then the heir would stretch the distributions over what would’ve been your remaining life expectancy according to the IRS.
Be Specific About Your Beneficiaries
The assets can be more efficiently passed to the beneficiaries if you specifically designate them rather than just simply naming your estate. This allows your beneficiaries to roll the assets to an inherited IRA and spread the distributions out over their life expectancy. It also allows them to avoid taking a large distribution and, therefore, a larger tax hit within those first five years.
Plan for the Future
That’s not to say there aren’t certain instances where you would name a trust as beneficiary. Just keep in mind that if the beneficiaries of the trust or estate are the same as what you would list on your IRA, then you’re creating an avoidable step that can prove costly to the next generation. The following table provided by the IRS shows the different options available to your beneficiaries.
For more information on planning for your beneficiaries please feel free to reach out to your Sikich Financial team.
Required Minimum Distributions for IRA Beneficiaries
Designated Beneficiary
Spouse Only
Non-Spouse
No Designated Beneficiary
(Including an Estate, Charity, or Some Trusts)
IRA owner dies on or after required beginning date
Spouse may treat as his/her own,
or
Distribute over spouse’s life using Table I*
- Use spouse’s current age each year,
or
Distribute based on owner’s age using Table I
- Use owner’s age as of birthday in year of death
- Reduce beginning life expectancy by 1 for each subsequent year
- Can take owner’s RMD for year of death
Distribute using Table I
- Use younger of 1) beneficiary’s age or 2) owner’s age at birthday in year of death
- Determine beneficiary’s age at year-end following year of owner’s death
- Use oldest age of multiple beneficiaries
- Reduce beginning life expectancy by 1 for each subsequent year
- Can take owner’s RMD for year of death
Table I
- Use owner’s age as of birthday in year of death
- Reduce beginning life expectancy by 1 for each subsequent year
- Can take owner’s RMD for year of death
IRA owner dies before required beginning date
Spouse may treat as her/his own;
or
Take entire balance by end of 5th year following year of death,
or
Distribute based on Table I
- Use spouse’s current age each year
- Distributions do not have to begin until owner would have turned 70 1/2
Take entire balance by end of 5th year following year of death,
or
Distribute based on Table I
- Use beneficiary’s age at year-end following year of owner’s death
- Reduce beginning life expectancy by 1 for each subsequent year
Take entire balance by end of 5th year following year of death
Source for table:
* Table 1 – Single Life Expectancy, Appendix B, Publication 590-B. https://www.irs.gov/retirement-plans/required-minimum-distributions-for-ira-beneficiaries
Advisory services offered through Sikich Financial, an SEC registered investment advisor.
These materials are based upon publicly available information and are provided for general information and educational purposes only. Sikich Financial does not provide tax or legal advice. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.
