Who is going to get what you someday leave behind in those tax-deferred retirement accounts? And, maybe even more important, how will they get it? Beneficiary designations for IRAs and retirement plans are important estate-planning tools and should not be overlooked.
Many retirees roll their retirement plans into IRA rollover accounts. This will defer taxes on the investment growth in their portfolio. There is no point in paying taxes before you have to, and certainly a lot of attention should be given to this aspect of estate planning. Sometimes, however, not enough attention is paid to the task of designation of beneficiaries of these accounts.
Retirement funds and IRA rollovers are often the largest investment asset that a retiree has. They produce a retirement income stream that replaces the paycheck you get when you were working. This "paycheck" can continue uninterrupted, even after the retiree's death if the beneficiaries have been designated correctly.
In most cases, the retiree should designate his or her spouse as the primary beneficiary. Upon the death of the account owner, the beneficiary can then roll the retirement plan assets into his or her own IRA rollover account tax free.
If the surviving spouse has not reached the age of 59 ½, the age the 10% penalty disappears, then he or she can treat the IRA as a "spousal beneficiary IRA". This provision of the tax code allows spousal beneficiaries to take distributions from their inherited IRA accounts without having to pay the 10% penalty. Clearly, then, this is very important if that retirement plan or IRA rollover account contributes a major share of income to that "retirement paycheck" stream.
For those who are over age 59 ½ and inherit an IRA, this account can be rolled into one that is wholly owned by the survivor. The survivor and owner of this account then can-and should-designate his or her own beneficiary, with the same considerations in mind.
In most cases, you should never name your estate as the beneficiary of your IRA or retirement plan, and there are good reasons for this. On the death of the owner of the account in which the estate has been named the beneficiary, the required minimum distribution is based on the owner's remaining life expectancy, calculated in the year of death. If this is done, tax deferral of an IRA or retirement fund, that could have been passed from one generation to the next, may be lost forever.
It is a fact of financial planning that a well-structured estate plan can keep your family from squabbling after you are gone. If you make careful designations of the beneficiaries of your retirement assets, you not only can keep the peace, but also make your loved ones pretty happy for many years to come.