IRA’s are wonderful savings vehicles. They are a tax favored method of building or supplementing a retirement income. As with most IRS approved programs, there are important details that should be attended to before you leave this world for a better place. The February Financial Planning magazine and the February 17, 2011 online edition of Morningstar listed several items that you may want to pay attention to. The beneficiary designation for your IRA “trumps” what is in your will. It is not all that unusual for a couple to go through a divorce these days. If so, make sure that you have updated beneficiary information or your ex-wife or ex-husband will inherit the balance in your IRA, regardless of your intent. If you don’t plan to use the IRA assets in your lifetime, consider converting to a Roth IRA. You will no longer have to take required minimum distributions and your heirs will inherit the money without having to pay income tax on the withdrawals. As a reminder, if you convert a traditional IRA to a Roth, you will owe ordinary income taxes on any previously deducted IRA contributions and on all IRA earnings. This additional income may put the IRA owner in a higher tax bracket. Everyone’s situation is different, so consult with your tax advisor. If you are trying to protect a financially challenged child or special needs child, consult with your legal and/or financial advisors for their assistance in getting the assets where you intend them to go. There are tax and legal considerations that may come into play. If you want to leave an IRA to a minor child, check with an estate planning attorney about setting up a trust or UGMA account. Children under the age of majority cannot be named as beneficiaries.
If you are leaving a charitable gift in your will, you may want to use your IRA for this purpose. Your estate will be eligible for a charitable deduction. Shifting your other assets to your heirs in lieu of the IRA could save significant income taxes since they would have had to pay ordinary income taxes on distributions from an inherited IRA. Educate your spouse on how to handle the inherited IRA. Under the existing tax code, it is generally OK to roll the inherited IRA into his or her own IRA account, and to stretch out the tax saving benefits of the IRA. However, if a younger spouse needs to supplement his or her income with distributions from the inherited IRA, it may make sense to keep it separate from an existing IRA because of the early distribution penalties. Avoid naming your estate as beneficiary. Doing so will require those who inherit assets to take distributions by the end of the fifth year following your death if you had not begun taking RMD’s, or in line with your RMD schedule if you had begun the distributions. Naming individuals as beneficiaries will provide much more flexibility to your heirs. Finally, if you have changed financial services providers and moved your IRA, you will usually have to list your beneficiaries on the new provider’s application form. They will not carry over. The bottom line to all this is attention to detail. When in doubt, consult with your financial, tax and legal advisors for guidance. This is too important to leave to chance.
For an affirmative close to these thoughts, here is some insight from Living the Message: “The end result of the act of worship is that our lives are turned around. We come to God with a history of nay-saying, of rejecting and being rejected. At the throne of God, we are immersed in God’s yes, a yes that silences all our “noes” and calls forth an answering yes in us. God, not the ego, is in the center. We are privileged listeners and respondents who offer ourselves to God, who creates and redeems.” And from Psalm 118,”I will give thanks to you, for you answered me and have become my salvation.”
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