Many years ago you started to put some money aside to provide a comfortable retirement. Maybe it was a pension plan, possibly a 401K plan or even an IRA. Do you have more than one of these accounts because of job or investment advisor changes? Have you gotten married since you opened your account? Have you had children, got divorced, had grandchildren or had a death in the family? Chances are one or more of these life events will apply to you. When you set your retirement account up you made a beneficiary election. Do you remember who you selected...or have a copy of the election you made? Your retirement account is just that, for retirement. However, in most cases these funds are never totally exhausted before the account owner dies so your beneficiary election is vital to proper retirement planning. Your beneficiary election will determine who inherits your retirement account, but more importantly, how and when it will be taxed to them.
Beneficiary elections can allow a retirement account to enjoy tax-deferred growth over many years if done properly. Poorly made elections can result in an entire account balance being taxable in less than five (5) years. Most people will select their spouse, a parent, a sibling or a trust to be the designated beneficiary. The important point here, is that this is who you wish to have your account go to now, and that this person is a qualified designated beneficiary (we will discuss trust beneficiaries in another article). A qualified beneficiary has the ability to stretch a retirement account to maximize tax-deferred growth over the longer of their life expectancy or that of the account holder. An unqualified beneficiary could result in a complete distribution of funds in as little as five (5) years or as long as the life expectancy (taken from the IRS provided tables) of the account owner in the year of their death. A qualified beneficiary could be a grandchild with a life expectancy of sixty years or more and, assuming a $100,000 IRA account, result in distributions in excess of $1,000,000 to that beneficiary.
So who is your beneficiary? If you have experienced some of the life events noted above, do you need to make an update? You have probably heard the stories of ex-spouses inheriting retirement accounts because a new beneficiary election form was never completed. Courts have ruled all over the country that divorce decrees and other legal documents have no standing to change a valid election form. What about a re-marriage or the death of a beneficiary? Do you wish to provide these funds to your children from your first marriage or want to stretch your account by electing a child or grandchild's life? These are the many things that we forget to review when we reach retirement age. As noted above, the important point is to have the person you wish to receive your account elected on your beneficiary form. It is also equally important that you know where a copy of that election form is (and hopefully another trusted family member or advisor as well). In the coming weeks we will explore taxation of inherited accounts, spousal rollovers, and the use of trusts as beneficiary.
For more information on IRA beneficiary elections, contact your local UHY LLP professional.
Wednesday, April 24, 2019 | 7:30 AM – 9:30 AM EDT | The Hartford Club