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Retirement Products

Beneficiary

Naming a beneficiary on a form provided by or accepted by an IRA custodian is important. Why? The individual and/or entity named on the beneficiary designation form, not the investor's will, determines who inherits the IRA.

It's important for an investor to review designated beneficiaries annually at a minimum and after life-changing events including: marriage, divorce, remarriage, and birth or adoption of a child. Not naming a beneficiary leaves the beneficiary determination to the terms of the IRA agreement, which could lead to naming the estate or creating a succession order such as spouse, children, grandchildren, etc., none of which may have been the investor's first choice. 

Here are basic guidelines on naming an IRA beneficiary. 

Spouse

A spouse beneficiary generally has the following options upon inheriting an IRA:

  1. Rollover the deceased spouse's account into his or her own IRA or a qualified plan. This transaction is tax-free and is permitted whether the account owner died before or after the commencement of taking required minimum distributions (RMD) at age 70½. If the spouse is younger than age 59½, the 10% premature distribution penalty reattaches when the inherited IRA becomes his or her own.
  2. Remain a beneficiary. RMDs do not begin until the later of December 31 of the year the IRA owner would have turned 70½ or December 31 of the year following the year of the account owner's death. This is generally suitable if the inheriting spouse is under age 59½; the 10% penalty does not reattach to any distributions since the surviving spouse may make withdrawals as desired without penalty.
  3. If the spouse is not the sole beneficiary, the spouse is treated as a non-spouse beneficiary subject to the rules below. Although a beneficiary can disclaim his or her right to the inherited IRA and effectively make the surviving spouse the sole beneficiary.


Non-spouse

Once a non-spouse inherits an IRA, a non-spouse can stretch the distributions based on his or her own life expectancy. The beneficiary is required to take RMDs annually commencing the year after the account owner's death. Life expectancy (“stretch”) is based on the beneficiary's age in the year after the account owner's death.

Should the beneficiary fail to take the minimum distribution by December 31 in the year after the account owner's death, the stretch option is most likely lost. Instead, the account is distributed to the beneficiary by the last day of the calendar year, which includes the fifth anniversary of the account owner's death (5-year rule).

Non-person

An account owner also has an option to name a non-person, such as a charity or estate, as his or her beneficiary. Only persons who are named on the beneficiary form can stretch IRA distributions over their life expectancy. Consequently, when a non-person is the sole or co-beneficiary, the ability to stretch withdrawals over the human beneficiary's lifetime(s) can be lost if the account is not properly segregated into its component parts for each beneficiary (or paid out) by September 30 of the year following the account owner's death.

This beneficiary discussion is based on federal law at the time of this writing and is subject to change. It is not intended to be tax or legal advice. When an IRA beneficiary designation is made the individual making the designation should review this serious matter with his or her tax or legal advisor before proceeding.
 

A Stretch IRA is for investors who will not need their IRA money during their own retirement. While the law does not restrict which tax payers can select the stretch IRA option, the stretch strategy is appropriate only for those individuals who simply need and plan to receive the required minimum withdrawals, taken at the latest time the law allows, without penalty, at age 70½.

Risks Involving the Stretch IRA Strategy:
Withdrawals by the account holder or beneficiaries in excess of the required minimum distribution (RMD) will exhaust the account at a faster pace, reducing or eliminating the effectiveness of the stretch strategy. Distributions exceeding the amount of the RMD could potentially subject a taxpayer to higher federal and possibly state income taxes. When investing assets, which will be used to stretch IRA payments, the investor must be cognizant of any front-end or back-end sales charges that can reduce the assets available.

During an extended period of declining investment returns, investors will experience income fluctuations that may cause additional withdrawals to be made that will exhaust the account at a more rapid rate. There can be no guarantee that a Stretch IRA strategy will be advantageous to your specific situation, and many of its benefits are based on current tax laws, which are subject to change.  If these laws change in the future, an investor’s ability to maintain estimated distributions may be affected.  Lengthy distribution periods, much like those involved in a Stretch IRA, expose an investor to significant market risk.

Please consult an IRA specialist at 888-522-2388 for additional information.

OPEN AN IRA

  1. Complete the writable IRA Application

  2. Print and send to Lord Abbett by mail, fax, email or use our Free FedEx shipping option

  3. You’ll receive a confirmation once your IRA is established

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