The amount of money being held in IRA plans exceeds over 4 trillion, which is more then any other type of retirement plan. Its safe to say that if you do not have an IRA, someone you know most likely does. Its very important to know that do’s and don’ts when it comes to IRA’s, and the taxation associated with them. Even though its not the most pleasant of conversations, its important to know what options you have when passing your assets to your beneficiaries.
The most powerful strength to an IRA is the fact that it is tax deferred. If you have an IRA that you have not taken any money out of, once you hit the ripe old age of 70 1/2, the government will start making you take a portion of those tax deferred dollars out through RMD’s (Required Minimum Distributions). There are a couple different scenarios that could happen if you pass away.
The most common and easiest is that your spouse inherits your IRA. This is know as spousal continuation. Your spouse basically steps in where you left off. Where this starts getting a little more complicated is when IRA’s are passed to children. This is know as an Inherited IRA. Even though the law allows IRA beneficiaries some flexibility, its very important to consult a local retirement specialist so you know and avoid any significant tax consequences.
With an inherited IRA, children will not be allowed to rename the policy under their name even though they can take ownership. If you were over the age of 70 1/2 when you passed away with your IRA, your children will still be responsible for having a portion of the funds distributed each year if they decided to keep it, and not cash out of it completely. This portion that comes out is very similar to an RMD, and in the situation above, the amount taken out each year is based on the deceased life expectancy. If you pass away with your IRA and were under the age of 70 1/2, then the amount taken out each year will be based on the life expectancy of the individual inheriting the IRA.
Inherited IRA’s are more popular today than ever before. Make sure to always consult a local retirement planning specialist if you’re dealing with an inherited IRA so you can avoid costly mistakes, and even unwanted tax bills.