Stretching Your IRA & Designating Beneficiariers
Multi-Generational Distribution Option
Multi-Generational Distribution Option
Stretching Your IRA: A simple way to make your money mean more to future generations under the IRS rule prior to 2020, was more tax efficient then it is today.
You have planned carefully for your retirement and sometimes the rewards for that wise planning can change if IRA assets are not spent and continue to grow during retirement. Taking only the Required Minimum Distribution (RMD) from your IRA may protect you from a sizeable tax liability, but not for your beneficiaries.
But today it is not that simple. The Stretch benefit is likely no longer a lifetime stretch, it's limited to 10 years. This shorter period could cause a multiyear tax burden if the IRA is a substantial amount.
It is important to consult with a tax professional on your particular situation and discuss any related tax matters. Multi-generational distribution can be complex depending on the type of beneficiary and required minimum distribution requirement.
Adjusting to the Change and Alternatives
It is not as easy to stretch your IRA for future generations.
But there are things that you can do to reposition the money and lessen the tax burden.
Here are some things to consider:
- Choose your beneficiaries and the percentages you would like to allocate for them. These decisions are revocable and can be changed at any time during the owner's lifetime. By choosing multiple beneficiaries, the taxes are spread between all the beneficiaries.
- Consider ROTH Conversion Options. Converting IRA money to Roth IRA, means you pay taxes on money converted at today’s tax rate. So, you are converting and paying the taxes with a plan in place. There are pros and cons to doing this. Contact your Amerity Financial professional to help determine what the pros and cons of this option would be in combination with advice from your tax professional.
- If your Required Minimum Distributions are not needed for current or future income or you anticipate that the funds will not be of use by you in the future, consider using the RMD to fund a large Life Insurance Policy. The Life Insurance death benefit will pass on to its named beneficiaries’ tax free.
Common Beneficiary Form Mistakes
There are plenty of other Beneficiary Form mistakes. Here are just a few of them:
Triggering probate on life insurance proceeds: Similarly, naming your estate and not an individual or a trust as the beneficiary of your life insurance subjects it to probate.
Disinheriting kids from a first marriage: Houses, bank accounts, and other assets held jointly go right to the co-owner, no matter what your will states, leaving children from a previous marriage no rights to contest. You can prevent them from being cut out with beneficiary designations on other assets that carry no spousal or joint ownership constraints.
Overlooking others whom you would like to remember: Estate laws favor spouses. Payable- or transferable-on-death accounts automatically go to the closest living relative (not a charity or life partner), unless designated otherwise.
Failing to get permission to bequeath your qualified retirement plans: By law, spouses are first in line to inherit retirement funds and assets subject to right of survivorship laws. If you wish to leave the money to someone else, your betrothed must sign a written waiver, or else the deal is off at death.
Assuming your wishes are on file: Don't take it on faith that a beneficiary form you filed 30 years ago is still in some bank's file or that when you switch plans your form follows suit. Get copies from every bank, fund, and insurance company.
Keeping your plans, a secret: While alive, Anne Friedman insisted that she had updated her million-dollar pension beneficiary form. But no one could locate it after her death. Make copies and tell your executor and loved ones where they are kept.