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More common IRA mistakes

Beneficiary designations

Posted: September 1, 2008 6:07 p.m.
Updated: November 3, 2008 5:00 a.m.
Last week my column addressed three common IRA mistakes.

This column will address another three by addressing beneficiary designations (or the lack thereof) that can have drastic effects on your IRA and protecting those assets for heirs.

n Failing to review and update beneficiary designation forms. Whoever is named on an IRA beneficiary form is entitled to receive the assets. IRA owners should review their beneficiary designations at least annually or upon any life event, such as a birth or adoption of a child, marriage, divorce or death of a family member.

To change a beneficiary designation on an IRA, you must actively change it with a new form. Also, if grandchildren are named beneficiaries, make sure the value of the IRA (and other assets) passing to the grandchildren do not exceed the applicable generation-skipping transfer tax.

n Beneficiaries fail to "stretch" their IRA distributions. Beneficiaries often liquidate their inherited IRA too quickly, resulting in immediate income taxes due.

A "stretch" plan can help pass IRA assets to beneficiaries by providing the following advantages:

n Beneficiary's tax liability is spread over their lifetime.

n The undistributed IRA assets will continue to be invested in a tax-deferred manner, even as withdrawals are being taken.

n Additional IRA assets can be accessed when needed.

n Transferring inherited IRAs to non-spousal beneficiaries. If non-spousal beneficiaries take receipt of IRA assets, it results in an immediate taxable distribution. Separate rollover rules apply to inherited IRAs.

Non-spousal beneficiaries do have the right to transfer IRA assets directly to an IRA at another financial institution. Such a transfer must be a direct trustee-to-trustee transfer.

Non-spousal beneficiaries must generally take distributions from their inherited IRAs, whether transferred or not, within five years after the death of the IRA owner. An exception to this rule applies if the beneficiary elects to take distributions over his or her lifetime, often referred to as "stretch." The solution is to transfer the inherited IRA directly to a beneficiary IRA at another financial institution.

As noted above, mistakes can be avoided by being prepared and reviewing your IRAs annually and remembering to address changes needed by any life changing events.

Contact your financial advisor and review your retirement plans to be sure they are up to date.

Jim Lentini, CLU, ChFC, IAR is president of Lentini Insurance & Investment, located in Santa Clarita. His column represents his own views and not necessarily those of The Signal.


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