Have you been named as a beneficiary on an IRA or do you need to update beneficiaries on an IRA or other retirement account? We get regular questions regarding what happens to an IRA or 401(k) after the owner passes. The first question is always, whether a beneficiary form was completed by the account owner. Hopefully a beneficiary form was completed during their lifetime; if not, the account is subject to the Will of the deceased (or the law if no will was created). Regardless of how the IRA or 401(k) is passed on, once a beneficiary (or beneficiaries) is determined, the beneficiaries have a few options on how to receive and manage the new asset:
- One option is for the beneficiary to take the entire balance within 5 years and pay income tax on the inherited amount.
- A second option is to elect to take regular distributions (RMDs) on an annual basis that is calculated using the beneficiary’s life expectancy, often referred to as a stretch IRA.
- If the ONLY beneficiary is a surviving spouse, the spouse can roll the assets over into an IRA in their own name, but be aware that if the decedent was over 59 ½ and the surviving spouse is under 59 ½, the proceeds are subject to a 10% early distribution penalty for any amounts you withdraw before you are 59 ½.
These are the most common options available, but be sure to discuss all potential options with your CPA or financial advisor. A good CPA or financial advisor will also discuss all tax consequences and see which option is the best fit for your plan.
When preparing your estate plan, you can include additional provisions, such as the use of a trust as the beneficiary of a retirement plan to provide creditor protection. There are many things to consider as you prepare your plan, among them: ages of the beneficiaries, the kind of estate plan you have (a will and a trust have different effects on retirement accounts), how you wish to divide these assets, the owner’s age, and potential tax issues to the beneficiaries.
At Grissom Law, we help clients create the best plan for their lifetime and incorporate plans for the distribution of retirement accounts per their wishes. We also help beneficiaries understand their choices after their loved one has passed.
Disclaimer
This Blog/Web Site is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide legal advice. By using this blog site you understand that there is no attorney client relationship between you and Grissom Law, LLC.