When many people pass away, they will still have a lot of money in their individual retirement accounts for a beneficiary to inherit. It is important to decide who that beneficiary will be, in a way that fits your overall estate plan.
The IRA can be used to balance out other bequests and can be used to enhance other estate planning goals. Depending on what you decide to do, there are various tax implications, which Morningstar recently discussed in "Who Should Inherit Your IRA?"
- 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. It can be complicated, so get expert advice before filing out a beneficiary designation form.
- Your estate - There is not much benefit to naming your estate as the beneficiary. However, if you cannot decide on another option, you can do so.
- A trust – If properly drafted, there can be huge benefits to leaving your IRA to a trust. Asset protection for your beneficiary is one reason. If the beneficiary would otherwise be a minor child or unable to manage their finances is another.
If you’re interested in protecting your retirement funds for your heirs, talk to an experienced estate planning attorney.
Reference: Morningstar (March 2, 2018) "Who Should Inherit Your IRA?"