Who's the beneficiary of your IRA? What should you consider as you select one?

• Author: Rizzi, Stephanie
• Position: ADVICE / ESTATE PLANNING

WHEN YOU THINK ABOUT estate planning, you probably think about making sure you have a will and you establish various trusts. While these are critical, by focusing only on these estate planning tools, something very simple is often overlooked: designating a beneficiary for your IRA. Naming a beneficiary for your IRA in writing and keeping the election current and updated as life changes will ensure that your money is distributed according to your wishes after you die. If you do not explicitly name a beneficiary, it is possible that your estate will become your default beneficiary This is a problem because the IRA then must pass through probate, creating additional costs, and the IRA proceeds could be subject to double tax (income and estate) up to more than 70 percent. So, what should you consider as you select the designated beneficiary for your IRA?

As owner of an IRA, you might name your spouse as beneficiary. In doing so, upon your death, your surviving spouse treats the assets from the IRA as his/her own by rolling them over into either a new IRA or an existing IRA. If your surviving spouse has not reached age 70 1/2, the age when the IRS requires the IRA owner to begin taking withdrawals (required minimum distributions), the assets can stay in the account, allowing them to continue to grow tax-deferred. Consider the possibility that your spouse will not need the assets in the IRA after your death. If this is the case, you can name your spouse as primary beneficiary and a child as contingent beneficiary. This allows you the flexibility to change the primary beneficiary designation later if you determine that your spouse will not need the assets. Your surviving spouse also has the option to disclaim the assets, resulting in the assets going to other named primary or contingent beneficiaries.

As owner of an IRA, you may choose to name a beneficiary other than your spouse. A non-spouse beneficiary has two options: a lump-sum distribution or distribution of the IRA assets over the beneficiary's lifetime (determined by a uniform life-expectancy table). If the lump-sum option is chosen, the IRA is distributed without penalty, ordinary income tax is paid, and the beneficiary keeps the remaining...