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Randall D. Armour: Your options in naming a beneficiary of your IRA

It’s Your Money

Posted: March 26, 2009 12:04 a.m.
Updated: March 26, 2009 4:55 a.m.
Naming the correct beneficiary of an IRA allows the possibility of tax-deferred growth for decades and can turn even a modest IRA into millions of dollars for your spouse, children, grandchildren or other beneficiaries. Below, I will discuss the basic options available when choosing an IRA beneficiary.

n Spouse: If you are married, naming your spouse as beneficiary will usually be the best option. Your spouse will then have the IRA money available for his or her support; this also allows for the spousal rollover option.

The spousal rollover allows your spouse to roll over your account into his or her own IRA. This further delays income taxes on the account until your spouse must start taking distributions, currently at age of 70.

Your spouse can then name a new beneficiary, such as children or grandchildren, and upon your spouse's death, the remaining distributions could possibly be made based on the new beneficiary's life expectancy, thus further deferring any income taxes.

n Individual beneficiaries: If you name a nonspouse as beneficiary of an IRA, annual minimum distributions will be required each year based on the beneficiary's life expectancy. This option also allows the account to be stretched out without the spousal rollover.

n Trusts: Naming a trust as beneficiary allows you to maintain control of your IRA money after you die because the trust can contain specific instructions naming the beneficiaries and how the money is to be distributed. Required minimum distributions can be paid to the trust or to the beneficiaries based on the life expectancy of the oldest beneficiary.

However, a large IRA can be split into smaller IRAs naming separate trusts for individual beneficiaries which will allow for required minimum distributions to be made based on the life expectancy of each beneficiary. The trust must meet certain IRS requirements.

n Charity: If part of your estate is to be left to charity, tax-deferred accounts may be ideal for this purpose because charities do not pay taxes on the money and the amount going to charity will not be included in your estate for estate tax purposes.

Determining which beneficiary is best for you requires an in-depth analysis of your overall financial and estate plans. Keep in mind that the laws in this area are complicated and filled with traps and tax penalties.

All of the choices mentioned in this article have certain disadvantages, which can be fully explained by a qualified professional adviser. Expert advice is needed, especially if your assets could be subject to estate tax upon your death and you have a sizeable amount in tax-deferred accounts.

Randall D. Armour is an estate planning attorney and licensed real-estate broker. "It's Your Money" appears Thursdays and rotates among some of the Santa Clarita Valley's financial professionals. His column represents his own views and not necessarily those of The Signal.


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