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Individual retirement accounts—IRAs—hold more than one-fourth of all the retirement plan assets in the United States, according to the Employee Benefit Research Institute.
CPAs recommend beginning retirement planning as early as possible, and contributing regularly each year to secure a financially sound future. Unfortunately, some people make simple mistakes that prevent them or their families from getting the most benefit from their IRAs.
The California Society of CPAs (CalCPA.org) highlights smart steps to take and errors to avoid.
There are many good reasons to choose someone as a beneficiary and make that choice official on a form that you give to your IRA custodian, while retaining an easily accessible copy for yourself or your heirs. Among other things, it offers your loved ones proof of your intentions if you die, which means they should be able to avoid the possible delays and costs associated with probate if it’s assumed that your estate is the IRA beneficiary.
Although it may sound like an easy solution, it’s a bad idea to name your estate as beneficiary. The IRA may be subject to creditors’ claims if it’s considered part of your estate. In addition, if you name a beneficiary, they are allowed to stretch required IRA distributions over their life expectancy, but that option does not apply to your estate.
It’s important to make adjustments to your beneficiary after major life events. If you divorce, for example, and no longer plan to leave your IRA to your former spouse, make sure you replace him or her with a new beneficiary. If you marry or have children, be sure to make updates for a name change or consider adding new family members as beneficiaries as appropriate.
Updating the beneficiaries in your will is not good enough if an outdated IRA beneficiary form still names the wrong people.
As a general rule, whenever possible, your heirs should not immediately liquidate a newly inherited IRA, because it’s typically better tax-wise to take only the required minimum distributions. Additionally, a spouse who inherits an IRA has the choice of rolling the funds over from the inherited IRA to their own IRA.
And again, individual beneficiaries will want to consider the “stretch” IRA which allows them to take required minimum distributions over their own lifetime, potentially minimizing tax impacts.
What would happen if your child inherited a significant amount of money from your IRA while he or she was still in high school? Could you be sure that he or she would make good choices that would benefit their short- and long-term financial security?
It’s tough to say how any young person would handle a windfall, which is why you should select a guardian or trustee when naming a minor child as beneficiary. Among other benefits, it will ensure that an adult is there to guide your child’s decisions and prevent him or her from making unwise choices.
In addition, if you are divorced and don’t want your ex-spouse determining how the IRA legacy is spent, naming an alternative guardian or trustee puts the responsibility in someone else’s hands.
Need help with retirement or estate planning, or any other financial issue? Your local CPA can help. Turn to him or her with all your financial questions. To find one near you, visit Find a CPA.
Copyright 2017 American Institute of Certified Public Accountants.
The Money Management columns are a joint effort of the AICPA and the California Society of CPAs as part of the profession’s nationwide 360 Degrees of Financial Literacy program.