BeneÞciary designation key to IRA asset transfer

by Jack Lantis

for the Business Journal

Recent Þnancial news has discussed many points about IRAs speciÞcally Roth IRAs but there's an all-important story that has gone unmentioned: the importance of designating beneÞciaries of your IRA when you pass away.

Regardless of which type of IRA you have, proper beneÞciary designation is crucial to the successful transfer of your assets.

Key to this process is life expectancy. IRS rules require you to take distributions over a period of time based on your life expectancy or the joint life expectancy of you and your designated beneÞciary as determined by IRS-published life expectancy tables.

By choosing the joint life expectan-

cy option, you can increase the number of years you can take distributions and make those distributions smaller if you wish.

Keep in mind that IRS rules contain special parameters limiting the distribution time frame for individuals naming a child or much younger person as designated beneÞciary.

The type of beneÞciary you choose will determine how that beneÞciary must receive your IRA assets after your death. Here's a breakdown of your choice's implications.

Your spouse. If your spouse is your beneÞciary, he or she can receive all your IRA assets upon your death. Of course, he or she will also have to pay income taxes on the full amount of the distribution.

As an alternative, your spouse could roll over the inherited IRA assets into his or her own IRA and continue to enjoy the beneÞts of tax-deferred compounding. Any withdrawals from a traditional IRA after age 59 1/2 would simply be taxed as ordinary income.

If your spouse is younger than age 59 1/2 when you die and needs immediate access to the IRA assets, a second alternative would allow your spouse to leave the funds in the existing account while maintaining beneÞcial control.

Under this scenario, these distributions are still subject to income taxes but not the typical 10 percent IRS penalty for early withdrawals.

Nonspousal beneÞciary. If you designate someone other than your spouse, such as a child or grandchild, that person will have fewer options when they inherit IRA assets.

Depending on your death, this beneÞciary may not necessarily have the ßexibility to implement distribution timing techniques that can control his or her income tax liability.

Your estate. If you name your estate as your IRA beneÞciary, your will becomes the controlling document in distributing your IRA assets.

Assuming your will is up-to-date, your IRA assets will be directed to the intended individuals. Be aware that naming your estate as beneÞciary means that only your estate's executor can manage the assets in your IRA until the funds are fully distributed.

Your trust. Some individuals choose to place all of their personal assets in a trust while they're still living because the trust manages the assets for them. But remember a trust cannot be a registered owner of an IRA.

If you want your IRA assets to be distributed to your trust upon your death, you'll want to name your trust as beneÞciary.

A charity. Leaving your IRA assets to a charity can allow your estate to enjoy the tax savings in the form of an estate tax charitable deduction. If you're charitably inclined, you may Þnd this alternative attractive.

Your personal needs will determine the best arrangement for your IRA assets, but make sure the fruits of your labor don't get spoiled by poor planning.

(Jack Lantis is an investment broker with A.G. Edwards & Sons Inc. in SpringÞeld.)

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