What you need to know when choosing your IRA beneficiaries

On Behalf of | Dec 14, 2021 | Estate Planning |

If you have a significant amount of money in your retirement accounts, you’ve probably given careful consideration to your beneficiary designations for these accounts. Individual retirement accounts (IRAs) come with some restrictions for those who inherit them, so it’s necessary to keep those in mind as you name your beneficiaries.

A law called the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which took effect last year, placed a new restriction on inherited traditional IRAs that requires many types of beneficiaries to take the full amount in the account in distributions within 10 years of the time they inherit it. (Previously, they had a length of time determined by their life expectancy to take distributions.) Since taxes are paid on the funds from traditional IRAs when they’re distributed, that means your loved ones could owe the IRS a considerable amount of money over that decade.

What are eligible designated beneficiaries?

Fortunately, there are exceptions for those defined under the law as eligible designated beneficiaries. Eligible designated beneficiaries are recognized as people who may need the long-term financial support provided by those funds. They aren’t held to the 10-year rule. They can use the previous life expectancy distribution plan to take their distributions.

Note that some of these categories of eligible designated beneficiaries still have some rules.

  • Surviving spouses
  • Disabled and chronically ill beneficiaries (or trusts set up for them) if they meet the requirements set by the law
  • Minor children – Their 10-year distribution time frame starts when they turn 18 (or the applicable state’s age of majority).
  • Non-spouses who are less than a decade younger than the deceased person

As you’re developing your estate plan, it’s important to make sure you understand the potential tax impact on your beneficiaries of the inheritances you leave them — and that they understand. While taking distributions over a relatively short period can increase their tax burden, they face a sizable tax penalty if they don’t take the distributions as required.

Remember, too, that your designated beneficiaries need to be listed on your accounts wherever they’re located as well as in your estate plan. These and many other considerations are why having experienced estate planning guidance is crucial.