By BILL SPANIEL
California Society Of CPAs
You’re hoping to leave your loved ones a nice legacy, something that can enhance their financial security or help them achieve special goals. Have you considered how your individual retirement account (IRA) fits into your estate plans? The California Society of CPAs (CalCPA.org) explains what you need to know.
Pick the right beneficiary
People fund IRAs so that they’ll have money for their retirement, but some may be secure enough financially that they will not need everything in their accounts. With that possibility in mind, IRA owners are asked to name beneficiaries who will inherit their accounts when they die, and it’s important to do so.
If you don’t have a beneficiary, it will complicate the timing and tax concerns for those who inherit your estate. Be aware, also, that if you designate a beneficiary in your account documents but name someone else to receive the IRA proceeds in your will, your money will go to the named beneficiary on your account. That’s why it’s very important to ensure that your beneficiary designation is up to date and in sync with your will or other estate documents.
Remember to consider updating your beneficiary when you marry, divorce or have another change in family situation.
Understand the rules for spouses
Married couples typically choose their spouses as IRA beneficiaries, and surviving spouses have some complicated choices to consider when they inherit. A surviving spouse, for example, may decide to roll the IRA over into a new or existing IRA in his or her own name, which may or may not be a good idea depending on the spouse’s age and whether he or she will need the money in the IRA.
Converting an inherited traditional IRA into a Roth IRA is another possibility, but you will have to pay taxes on the conversion. Spouses can also transfer the account assets into an Inherited IRA. Your CPA can explain the options and help you decide which one is best for you.
…And for children and grandchildren
If you name children or grandchildren as IRA beneficiaries, they will have to begin taking annual required minimum distributions (RMDs) immediately, and those RMDs will be taxable. However, the amount of the RMDs will be based on their expected lifetimes, so the annual taxable distributions will be relatively small and the money in the account will have many years to grow tax free.
That is preferable to naming your estate as the IRA beneficiary because it helps avoid probate and stricter distribution time limits. Another option: If your children or grandchildren have been named as contingent beneficiaries on your IRA, your surviving spouse can disclaim the IRA, which also allows younger generations to inherit instead and enjoy the account’s tax-free growth over their lifetimes.
Consider a charitable gift
If you’d like to use your inheritance to make a difference to your favorite cause, there are two reasons to leave your IRA to a charity. First, the organization will get your legacy tax free, allowing it to do a great deal of good with your gift. Second, your estate will be able to deduct the donation, which lowers the amount of any estate taxes your heirs may owe.
Remember, too, that if you are over 70½ and taking required minimum distributions from an IRA, you can donate those funds to a qualified charity through a qualified charitable distribution. If you are certain you will not need your entire IRA during your retirement, this is one way to lower the taxes you owe on your RMD and watch your money being put to good use during your lifetime.
Ask your local CPA
Have more questions about IRAs and inheritance? Your local CPA has the answers. Turn to him or her for expert advice on all your financial concerns. Visit CalCPA.org/findacpa to find one near you.
The Money Management columns are a joint effort of the AICPA and the California Society of CPAs as part of the profession’s nationwide 360 Degrees of Financial Literacy program. To listen to podcasts with more financial tips, go to http://tinyurl.com/calcpafinem.