Use Care with IRA Beneficiary Designations

by Daniel A. Bechtold, Esq. and C. Kelley Corbridge, Esq., Attorneys at Law

In the last few years, the IRS has created some “taxpayer-friendly” rules for Individual Retirement Account beneficiary designations. In general, these benefits relate to over what time frame your beneficiary is required to withdraw funds from your IRA and realize taxable income.

As an individual, once you reach age 70 ½, you are required to withdraw funds from your IRA based upon your life expectancy and a fictitious joint individual who is ten years younger than you. The result of this rule is that you are never required to withdraw the last dollar from your IRA.

Spouses have the greatest flexibility as an IRA beneficiary, including the ability to roll it into their own IRA and use the same “joint life expectancy with a fictitious person ten years younger” rule. However, once the spouse has also died, the next set of beneficiaries must withdraw the IRA balance over specified time-frame.

Under the prior IRA distribution rules, non-spouse beneficiaries were generally required to withdraw the entire IRA balance within five years of the IRA-owner’s death. Under the new rules, as long as your IRA can be divided into separate shares, each beneficiary of your IRA may use their individual life expectancy to withdraw funds.

There are several other restrictions and limitations to these options which may make your beneficiary designation more complicated, such as the ability to benefit a spouse from a second marriage while still passing assets to children from the first marriage. Accordingly, please consult with your estate planning attorney regarding the beneficiary designation of your IRA, 401(k) or pension plan to make sure that the provisions are consistent with your existing estate plan and provide for maximum income tax deferral.