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  • Milad Taghehchian, CPA, CFP(R)

IRA Beneficiary Rules

Greg Phelps is a CFP® certified financial planner in Las Vegas, Nevada. As an Ed Slott Elite IRA Advisor, he’s also an IRA specialist. We asked Greg to guest write for our blog on how beneficiary IRA’s work, and the rules surrounding them. IRA Beneficiary Rules IRA’s (individual retirement accounts) are one of the most popular ways for investors to save for retirement. In fact, as of 2012 there was nearly 50 million American households with over 5.4 TRILLION dollars in individual retirement accounts. IRA’s were created in 1974 under the Employee Retirement Income Security Act (better known as ERISA). When used properly as part of a well-rounded financial plan, IRA’s can provide a source of retirement income that can last your entire lifetime! Not everyone will completely spend down their individual retirement accounts however, leaving potentially large sums of untaxed (or tax free in the case of ROTH IRA’s) monies to beneficiaries. So what exactly happens to your IRA when you die?​ Spousal Beneficiary. If your spouse survives you and they’re named as your primary beneficiary, they get the most flexibility with managing your IRA. They can leave the funds in your current IRA and simply re-title it as something like “John Doe, Deceased, IRA for the benefit of Jane Doe”, OR alternatively they can roll the entire IRA into an IRA in their own name. Generally, the spouse will want to roll the IRA into an IRA in their own name and manage it according to their own personal financial plan moving forward. There is however one big exception for that, which is a spouse beneficiary younger than age 59 1/2. If a younger (than 59 1/2) spouse beneficiary inherits an IRA, they may need the money for financial support. If they’ve rolled that IRA into their own IRA there will be a 10% penalty on any distributions. If however they leave the IRA as an inherited IRA, there is no 10% penalty on the distribution prior to 59 1/2. For this reason it’s much safer to leave the IRA as an inherited IRA until the spouse is 59 1/2 or older. Non-Spousal Beneficiary. Non-spouse beneficiaries such as your children, friends, or other family members, don’t have nearly the same flexibility. A non-spouse beneficiary can withdraw the IRA money in it’s entirety (paying income taxes owed) within 5 years, OR withdraw the funds as annual payments over their lifetime. Should they choose to withdraw the inherited IRA funds over their lifetime, they must begin doing so by December 31st of the year following your death. This rule is on the chopping block however, as new budget proposals would require withdrawal of all IRA money by a non-spouse beneficiary within 5 years, eliminating the ability to “stretch” the IRA funds over the beneficiaries lifetime. If you’re currently taking your required minimum distributions (meaning you’re over age 70 1/2), the beneficiary MUST withdraw the required minimum distribution prior to December 31st of the year you die. If your beneficiary misses your required distribution it is subject to a 50% penalty of the amount not withdrawn. Remember, there are never any penalties for distributions from an inherited IRA, even if taken prior to age 59 1/2. Also, it’s critical the beneficiary NEVER EVER request a check payable to them, and NEVER EVER put the IRA into an IRA in their own name (with the exception of a spousal rollover as mentioned). Seek out the advice of a CFP financial advisor professional before you do anything with the inherited IRA. A great CFP will help you create a financial plan to maximize the value of the IRA inherited! If you're a Nevada resident and looking for Las Vegas financial advisors, give Greg a call at 702-987-1607.

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