An important aspect of owning an Individual Retirement Account (IRA) is knowing how to properly designate a primary and contingent beneficiary to your account. Plenty of people enlist professional help when drawing up a will, but many choose to try and tackle the paperwork of assigning a beneficiary to their IRA on their own.

Missteps in assigning an IRA beneficiary (and not keeping the paperwork updated) can affect how much money your heirs receive, and when they receive it. Without a beneficiary, your IRA account’s funds and assets are left to the account custodian to deal with.

Each account custodian has rules regarding what happens to your IRA if you pass away without designating a beneficiary. Depending on the custodian, your account could be passed to your spouse, an ex-spouse, creditors, or a relative you never wanted to grant access to your assets.

What is an IRA beneficiary?

A beneficiary to your IRA can be any person or entity you choose to inherit the benefits of your retirement account or IRA after you die.

Beneficiaries of a pre-tax retirement account, like a Traditional IRA, must include any taxable distributions they receive from your IRA in their gross income for that year.

Spousal Beneficiary

The way your IRA inheritance interacts with your beneficiaries depends on whether you are married to them.

If your primary beneficiary is a spouse, they have the following three choices with your IRA account:

  1. Treat your account as their own IRA by designating themselves as the account owner, or
  2. Treat your account as their own by rolling it over into a Traditional IRA or into a:
    1. Qualified employer plan
    2. Qualified employee annuity plan (a 403(a) plan)
    3. Tax-sheltered annuity plan (a 403(b) plan)
    4. Deferred compensation plan of a state or local government (a 457(b) plan), or
  3. Treat themselves as the beneficiary rather than treating the IRA as their own.

Once your spouse receives a distribution from your IRA after you have passed away, the distribution can be rolled over into your spouse’s existing IRA(s) within the 60-day limit—as long as the distribution is not a required distribution for the beneficiary account. This is an option even if your spouse is not the only beneficiary of your IRA.

Spousal Distribution Rules

If your spouse is your only beneficiary, they can either delay distributions from the inherited IRA until you would have reached 70½ years of age (if you passed before this age,) or they can treat the Roth IRA as their own and receive distributions just like a regular Roth IRA.

Non-Spousal Beneficiary

If any of your IRA beneficiaries are not your spouse, they do not have the option to treat your IRA as their own. Your beneficiary will not be able to make any contributions to your IRA, or roll over any funds into or out of the inherited IRA.

However, your beneficiary will be able to make a trustee-to-trustee transfer of the funds in the Inherited IRA, as long as the IRA where the funds are moved into is opened and maintained under your name, for the benefit of the beneficiary.

Non-Spousal Traditional IRA Distribution Rules

If the Inherited IRA is a Traditional IRA, your non-spousal beneficiary will not owe tax on the assets in your IRA until they receive a distribution.

Non-Spousal Roth IRA Distribution Rules

If the Inherited IRA is a Roth IRA, there are two options to how your beneficiary can receive distributions from the account:

  1. All of the funds in the account must be distributed to your beneficiary by the end of the fifth calendar year after the year of your passing, or
  2. The interest is paid to your beneficiary over the life or life expectancy of the designated beneficiary as annuity.

If your beneficiary chooses to receive distributions from the Inherited IRA as annuity, the entire interest of the account must be paid over the designated beneficiary's life expectancy.

Your beneficiary must start receiving distributions before the end of the calendar year following the year of death.

Use a Professional

When designating a primary and contingent beneficiary to your retirement account, enlist the help of a qualified law or financial professional to make sure your paperwork is completed properly and stays up-to-date.

Complications that keep your intended beneficiaries from receiving their inheritance can add hardship to heartache for your grieving loved ones at your time of passing.

Contact Rogers & Moss today to make sure the future of your IRA account is secure >