Having up-to-date beneficiary designations is a must for any Survivorship Plan. Along with everything else in life, an IRA may not be as straight forward as you think. I have combed through several references including the IRS publications to really understand the nuances to inheriting an IRA and it has left me scratching my head. How is one to explain this concisely in one post? I came to the conclusion, all the options can’t be addressed fully in this one post, so I am raising little red flags for your consideration.
Here are a couple of things to keep in mind:
Not Having a Beneficiary Designation on Your IRA
The question that comes up on a regular basis is, “What happens if I die without a beneficiary designation in place?” “Your estate would be the default beneficiary,” is my usual response. That would mean your heirs would eventually get the money…..along with a significant tax bill that could have been avoided.
Different Scenarios of Inheritance Require Different Actions
IRAs can be inherited from a spouse or a non-spouse. These two scenarios are treated differently in the eyes of the IRS and have different options dictating what you can do with each of these. Inheriting an IRA from a spouse is a little more straight forward while inheriting an IRA from a non-spouse has a few twists and turns. Regardless of which one applies to you, talk to your tax adviser or CPA to make sure you take the best route and not give Uncle Sam more than he deserves.
Moving an IRA
I was surprised to learn that some custodians/companies holding IRAs forbid the transfer of an IRA to another custodian via a trustee-to-trustee transfer. So… if you have an IRA with COMPANY A and your beneficiaries would want to transfer it to COMPANY B, you will need to check with the custodian of your current IRA account to ensure that it can be moved by your heirs without triggering an unnecessary tax bill. This is a hidden surprise that is usually discovered after a death.
Required Minimum Distributions
If your 75 year old mother leaves you her IRA, note that she is under the IRA rule that requires her to take out a minimum distribution every year after she reached 70 1/2 years old. If she passes away, make sure that the required minimum distribution (RMD) has been taken out BEFORE you transfer or take out any money. There is a 50% penalty by the IRS if this is not done. 50% of the RMD could be significant. So note the age of the person leaving you the IRA and take action accordingly.
If you are setting up your Survivorship Plan and it includes IRAs, 401Ks and/or annuities, make sure you let your heirs know that these have tax consequences associated with them and to see their CPA BEFORE they do anything with the money. If you are on the receiving end as a beneficiary, you will also want to consult with your tax adviser or CPA. It’s just one of those little “gotchas” that people don’t see coming.