What Happens to an Individual Retirement Account With No Recipient Designation?
When you pass away leaving no recipient for your Irritated account is paid to your estate. There are 2 reasons that you don’t desire this to occur. If your IRA ends up being part of your estate, then it has to go through probate prior to it can pass to your beneficiaries. Second, having your IRA pass to your estate rather than to a designated recipient can severely restrict the benefits that your successors get from the account. Here’s why:
When an IRA is paid to a designated beneficiary, that recipient can make the extremely smart option to take just the needed minimum distribution, or RMD, from the account each year. This is the minimum quantity that, by law, your beneficiary has to withdraw. Your beneficiary’s RMD is based on the Individual Retirement Account’s balance and the recipient’s life span. By taking just the RMD each year– which is also known as “stretching” the IRA, your beneficiary saves himself earnings taxes related to a traditional Individual Retirement Account (because he’s just taxed on the amount that he withdraws) and he protects the account, allowing it to make interest and grow throughout the years. Of course, he always has the option of withdrawing more than the RMD at any given time. It’s important that you inform any beneficiary about the advantages of stretching an IRA, or talk to your estate planning lawyer about choices for guaranteeing that your recipient’s inheritance is preserved.
Special Rules for Estates
If your IRA is left without a designated recipient, then it’s paid to your estate. When this happens, IRS rules determine that the account needs to be totally distributed within five years. So, although your heirs eventually share in your IRA funds, it’s most likely that a great part of those funds will be consumed by earnings taxes. Plus, being distributed within 5 years significantly restricts the life expectancy of your Individual Retirement Account, interrupting its development– and its benefit to your liked ones.
What to Do
So, as the owner of an Individual Retirement Account, make sure that you designate not just a main recipient, however an alternate recipient also. And, specifically if you plan to leave your beneficiaries a significant inheritance using your Individual Retirement Account, talk with your estate planning attorney about options for making sure your liked ones get the optimum advantage from your account.