Answering Frequently Asked Questions About IRA Beneficiaries

Answering Frequently Asked Questions About IRA Beneficiaries

Based on whom you name as beneficiary of your individual retirement account (IRA), there are ways you can extend the benefits far beyond your standard tax-deferred withdrawals. In fact, you can keep the money growing throughout the lives of your children or grandchildren.

After a certain point, you must begin withdrawing money from your IRA — typically, after you are 70 ½. But if you do not withdraw all the money from your IRA before you pass away, you can keep money in the account, growing tax-deferred for future decades.

Below are some questions we often hear about using an IRA as an estate planning tool, along with some quick answers.

Q: How much money do I have to withdraw?

Once you get to the “required beginning date” of your withdrawals, you’ll need to begin taking out a minimum amount of money. The IRS’s Uniform Lifetime Table provides a divisor based on your age. Every year, you divide the year-end value of your account by that divisor for the minimum amount of money you must withdraw for that year.

At age 70, the divisor is 27.4. Thus, if you have a year-end balance of $1 million, you would divide that amount by 27.4, which means your first minimum distribution would be $36,500. The divisor gets smaller every year.

Q: Is my distribution affected by my beneficiaries?

No. All people are subject to the same IRS distribution rules set, whether or not they have a beneficiary. Upon your passing, the distributions are based on the life expectancy of your beneficiary. To that end, choosing the right beneficiary will help you realize the most tax-free growth.

Q: Whom may I select as my beneficiary?

You may name your spouse, your children, your grandchildren, a trust or a charity — or any combination of these choices. A spouse is the most common option, as the money will be immediately available to provide for the surviving spouse and your spouse can use the spousal rollover option to provide more opportunity for tax-deferred growth in the future.

However, if your spouse has already passed away or you are unmarried, selecting your children will enable you to still get a significant amount of tax-deferred growth, even if you don’t get to use the spousal rollover. One thing you should strive for is to name a beneficiary of your IRA to avoid it being paid into your probate estate.

For more information on using an IRA as an estate planning tools, meet with a knowledgeable Florida attorney at BaumannKangas Estate Law.