WHOM SHOULD I NAME AS MY IRA BENEFICIARY?

Individual retirement accounts (IRAs) were designed to serve as retirement nest eggs, and for many people they are just that. But IRA owners often pass some or all of their IRAs on to others. That’s when things get sticky.

Individual retirement accounts (IRAs) were designed to serve as retirement nest eggs, and for many people they are just that. But IRA owners often pass some or all of their IRAs on to others. That’s when things get sticky.

Name someone.  If there’s one mistake you don’t want to make, it’s failing to name a beneficiary at all. If you don’t name a beneficiary by April 1 of the year following the year you turn 70 1/2, the minimum distributions you must take from the IRA will be based solely on your life expectancy. Naming a beneficiary allows you to stretch out the payments over the joint life expectancy of you and the beneficiary.

Die before you begin mandatory minimum distributions and the IRA goes into your estate if you haven’t named a beneficiary. All assets in the IRA must then be distributed within five years to the estate’s beneficiaries, potentially triggering a large tax bill.  

Name your spouse. Of course, not everyone is married, and this isn’t always the best choice even if you are. However, for most people, naming their spouse offers the most flexibility. First, you have the advantage of the joint life expectancies, which makes minimum payouts smaller. Second, your spouse will receive the IRA free of estate taxes. Third, the surviving spouse can roll the IRA proceeds into his or her own IRA. Distributions don’t have to begin until the spouse turns 70 1/2, and the spouse has the option of naming a new beneficiary, such as children. When they inherit, they can continue minimum distributions over their lifetime. (One caution here: Some IRA custodians don’t allow beneficiaries to name their own beneficiaries.)  

The surviving spouse, by the way, doesn’t have to roll your IRA over. He or she can leave it in your name, and not start taking distributions until December 31 of the year you would have turned 70 1/2. This might be the best option in some situations, particularly if you are younger than your spouse and there’s no desire to pass it on to children.  

Name a nonspouse. If you aren’t married or you don’t want to name your spouse as beneficiary, perhaps for estate tax reasons, you may want to name other heirs, such as your children or grandchildren. Again, by naming them you can stretch out your required payouts. However, nonspouse beneficiaries don’t have as much flexibility as your spouse does.  

First, they can’t roll the IRA into their own IRA when they inherit. If you die after 70 1/2, when required distributions have begun, the beneficiary must continue taking minimum distributions at the pace you would have been required to take them if you hadn’t died. If you die before distributions begin, the beneficiary can take minimum distributions based on their own life expectancy as long as they start withdrawals by the end of the year after your death. They also have the option of withdrawing all the funds within five years—and paying the taxes.  

Name a trust. A trust as an IRA beneficiary might be useful if you want to name a minor as beneficiary of the trust, the person isn’t capable of managing the trust, there is a second marriage, or if [Ed Slott IRA newsletter in IRA trust file, Golberg commentary, 7] you have an estate tax problem. However, naming a trust as the beneficiary is very tricky, and should be done, if at all, only with great care and expert advice.  

Name a charity. If you have an estate tax problem, naming a charity as an IRA beneficiary can provide significant tax benefits. But don’t name a person and a charity as co-beneficiaries within the same IRA. Keep the charity in a separate IRA. A charity doesn’t have a life expectancy like a person, so the distributions to the IRA owner cannot be based on joint life expectancy, and the minimum required payouts would be larger.