Individual Retirement Accounts (IRA) are popular ways for people to save money for retirement. IRAs allow people to put money into an interest generating account and take payments from the account after retirement. IRAs need special consideration when people are creating their estate plans so that their loved ones will receive as much of the accounts' contents as possible. When making an estate plan involving an IRA, a person needs to decide who will receive the IRA and consider the tax implications for inheriting an IRA.
Who Receives the IRA?
The most important thing that a person making an estate plan with adult beneficiaries involving an IRA often needs to do is to name a person as a beneficiary for the asset. One of the benefits of an IRA is that it is a non-probate asset, meaning that a person can leave the asset to a beneficiary without the asset having to go through the probate process. It is a good idea to name a primary and an alternate beneficiary, in case the primary beneficiary should predecease the person leaving the IRA.
If a person does not name a beneficiary or names his or her estate as the beneficiary, then the money in the IRA will become part of the decedent's estate and will have to go through probate, possibly subjecting the asset to estate taxes. Virginia does not have estate taxes anymore, but the federal government levies taxes on estates larger than $5 million currently, with the amount set to return to the previous $1 million limit at the end of 2012.
Taxes and the Inherited IRA
When deciding who to name as a beneficiary of an IRA is it important to keep various tax implications in mind. A spouse may inherit an IRA with no complications and roll the money over into his or her own IRA without any penalties.
However, a named beneficiary who is not a spouse needs to begin withdrawing from the account right away, even if he or she is not of retirement age, and needs to keep the account separate from his or her own retirement account. The beneficiary can stretch withdrawals over many years, taking an amount out each year based on I.R.S. life expectancy tables.
While the withdrawals are not subject to the normal 10 percent penalty for early withdrawal that normally incurs when a person withdraws from an IRA before retirement, the withdrawals do count as income for the beneficiary. It is important for those designating beneficiaries for an IRA to ensure that the extra income will not push the beneficiary into a higher tax bracket that negatively affects his or her circumstances.
Stretching an IRA
For those who primarily want the IRA assets to benefit future beneficiaries rather than to serve as retirement income for the owner, stretching the IRA to its maximum length may be a good option. To do that, a person takes the minimum amount in payments that he or she can, starting at age 70.5. This will leave the majority of the assets in the IRA for the beneficiary. The beneficiary can then stretch the asset payments out over his or her lifetime and even name a second generation beneficiary.
IRAs are helpful retirement savings tools and with a little planning they can also help a person pass on assets easily after he or she has died. If you are wondering how to work an IRA into your estate plan, contact an experienced attorney who can advise you of all of your options.
