If you’re revisiting your estate plan as the new year begins (or finally getting around to developing one), don’t forget your Individual Retirement Account (IRA) beneficiary designations. Remember that just including your designated beneficiaries for retirement and investment accounts in your estate planning documents is not enough.
The companies that hold your accounts recognize only the beneficiaries you list with them – not what you have in your estate plan. It’s best, of course, to list the same beneficiaries in both places so that there’s no confusion among your loved ones about what you intended.
Tax consequences and the SECURE Act
Since IRAs are a product established by the federal government, they have a multitude of unique and often complex rules and restrictions not just for the account owner, but for those who inherit them. Some beneficiaries may have to take a distribution on the full amount they inherited in a relatively short period. That can have significant tax consequences.
Under a law that took effect a couple of years ago, the Setting Every Community Up for Retirement Enhancement (SECURE) Act, anyone who is not considered an “eligible designated beneficiary” must take full distribution of their IRA inheritance within 10 years. That may sound like a long time, but if you’re talking about hundreds of thousands of dollars or even more, that can have a profound effect on a person’s taxable income.
The categories of eligible designated beneficiaries
The SECURE Act recognizes that some people may need to use their IRA inheritance for financial support for many years – perhaps for the rest of their lives. Therefore, they don’t have to take full distribution within a decade. Their distribution requirements are based on their life expectancy. Eligible beneficiaries are:
- The surviving spouse of the diseased
- Beneficiaries with a disability as designated under the law
- Chronically ill beneficiaries (again, as defined by the law)
- Minor children of the diseased (until they reach adulthood – typically 18)
- Beneficiaries who are up to 10 years younger than the deceased
As you’re developing your estate plan, you owe it to your loved ones to consider the potential tax implications of any inheritance and work to minimize it. With experienced legal guidance, you can do that.