Name Your IRA Beneficiary

December 28th, 2006  |  Published in 401K, Disbursements, IRA  |  5 Comments

It is critically important that you properly name your IRA beneficiary because, in the event of your demise (which will hopefully happen very far into the future), the tax ramifications change based on who you name as your beneficiary. Usually, your spouse, if you have one, will be able to inherit your IRA without any income tax effects because you two are legally bound. Everyone else, though, is subjected to special rules.

If you die before you turn 70.5 and the person who inherits your IRA is not named the beneficiary, that person must take distributions within a year and completely empty the IRA within five years. This will probably push them into a higher tax bracket and increase the percentage of your IRA that goes to taxes and decrease the percentage your heir gets to keep. If that person is named the beneficiary, then he or she still has to take distributions with a year but then can stretch them out over their lifetime and not over five years. If you die after 70.5, your heirs must take distributions based on the projected life expectancy remaining and may be subject to an estate tax (if you have more than $2M in your estate).

(Please seek a professional before making any financially related decisions, remember I’m just an amateur)

  

Responses

  1. fivecentnickel.com says:

    December 31st, 2006 at 10:05 pm (#)

    Weekly Roundup – 12/29/06…

    Here’s a quick look at some of the articles that caught my eye over the past week:
    Jim wants to know if your retirement investing strategy is tax efficient.
    MBH applies lessons learned from crocheting to his investing life.
    FMF has a tip for savi…

  2. The Carnival of Personal Finance #81 is up up and away! says:

    January 2nd, 2007 at 1:47 am (#)

    […] Some other articles I found to be of great interest in this Carnival were Planning and Goal Setting Week: Share Your Goals from Consumerism Commentary, Name Your IRA Beneficiary from My Retirement Blog, Questions to ask your prospective employer in an interview from My Financial Journey and Investing – Mutual Funds – The Economic Cycle of Sectors from FIRE Finance. […]

  3. thc says:

    January 2nd, 2007 at 10:37 pm (#)

    IRA rules are very complex and you make some excellent points. However, the number one reason to name a beneficiary for your IRA is so it won’t have to be probated upon your death. Without a designated beneficiary you have no control over where your money goes.

  4. Joe says:

    January 30th, 2007 at 2:10 pm (#)

    I am in the middle of a divorce but still want to invest in retirement. I have been told that with 401K accounts that tyhe spouse is automatically the beneficiary. Is it possible to place retirement funds in some other fund where the spouse is NOT the beneficiary, such as an IRA or Roth? Thanks!

  5. retirehappy says:

    January 30th, 2007 at 5:29 pm (#)

    From what I understand, the automatic beneficiary is the beneficiary named if you don’t name one yourself and typically the spouse is thus named a beneficiary. However, if you specify a beneficiary and it isn’t your spouse, I believe that there is no provision that states you must put your spouse as your beneficiary.