Naming an IRA beneficiary is essential. Why? The individual and/or entity named on the beneficiary paperwork, opposed to the investor's will, determines who inherits the IRA.
It's important to review and update if needed, beneficiary designations at least annually after a life-changing event 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.
Spouse beneficiary generally has the following options upon inheriting an IRA:
1. Roll over the decedent’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 taking required minimum distributions (RMD) at age 72. However if the surviving spouse is younger than age 59½, 10% early distribution penalty tax 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 age 72 or December 31 of the year following the year of the account owner's death.
3. Treat deceased spouse’s IRA as surviving spouse’s own.
The Setting Every Community Up For Retirement Enhancement Act (SECURE) Act of 2019 the maximum period over which most retirement account beneficiaries can withdraw inherited assets to a maximum of 10 years. For inherited accounts where the owner died in 2019 or earlier minimum distributions taken based on the beneficiary's life expectancy
Beneficiaries, post SECURE Act, that qualify as “Eligible Designated Beneficiaries” continue to be able to 'stretch' distributions from inherited accounts using their Single Life Expectancy
An IRA owner also has an option to name a non-person, beneficiary such as a charity or estate.
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.