Who Should Be Beneficiary to Your IRA?

Naming the right beneficiary could result in years of tax-deferred savings

By Chris Berry

Would you like to transform your modest tax-deferred account into millions for your family? Based on whom you name as beneficiary, this money can continue growing tax-deferred for your children’s or grandchildren’s lifetimes.

Typically, after you turn 70 1/2, or your required beginning date, the government makes you start taking money out. However, naming the right beneficiary can ensure that your money continues to grow tax-deferred for decades.

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 To calculate your required minimum distribution you must annually divide the year-end value of your account by a life expectancy divisor from the Uniform Lifetime Table (provided by the IRS). This produces the minimum required to be withdrawn from the account for that year. You can choose to take out more, of course.

There was a time when your beneficiary could affect your distribution, but no longer. Distributions are based on your beneficiary’s life expectancy (or your remaining life expectancy if you die without one.) However, naming the right beneficiary is still imperative to receiving the most tax-deferred growth.

When naming a beneficiary you have five basic options: your spouse, if married; your children, grandchildren or other individuals: a trust, charity, or some combination of the above.

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The majority of married folk name their spouse as beneficiary because the money becomes available to provide for the surviving spouse, and the spousal rollover option offers additional years of tax-deferred growth. Additionally, in the event that your spouse is more than 10 years younger than you are, you are able to use a different life expectancy chart to lower your required distribution.

If you die first, your surviving spouse can “roll over” your tax-deferred account into his or her personal IRA, delaying income taxes until he or she is required to take minimum distributions on April 1 after age 70 1/2.

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Your spouse will name a new beneficiary once he or she does the rollover. It is best to name someone much younger, relative to how old your children and/or grandchildren are. After your spouse died, the beneficiary’s actual life expectancy can be used for the remaining required minimum distributions.

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