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What you need to know when designating your IRA beneficiaries

On Behalf of | Sep 26, 2022 | Estate Planning

If you’re like many Americans, a good portion of your assets are in retirement accounts. If you’ve been putting money away regularly, you likely have one or more individual retirement accounts (IRAs) with pretty healthy balances.

You should already have beneficiaries designated on those accounts. You can also designate those beneficiaries in your estate plan. Note, however, that if there’s any discrepancy between what’s in the estate plan and the beneficiaries listed on the accounts, the names on the account take precedence. That’s why if you make changes, you need to do so both places.

What you need to know about the SECURE Act

While you may think you’ve chosen the appropriate beneficiaries for your IRAs, you’ll want to consider the financial impact of that inheritance on them. Thanks to a federal law that became effective in 2020 called the Setting Every Community Up for Retirement Enhancement (SECURE) Act, not everyone has the same amount of time to take distributions on inherited IRAs.

What are eligible designated beneficiaries?

Under the SECURE Act, anyone who inherits an IRA who’s not an “eligible designated beneficiary” is required to take distributions of the total amount left to them within 10 years. Since traditional IRA distributions are taxed as income, that can add up to a lot of money your loved one may have to pay in taxes if you leave them a significant amount of IRA assets.

That’s why you may want to consider leaving your IRAs only to those who are classified as eligible designated beneficiaries. These are people who are presumed to need the financial support an IRA inheritance can provide after a loved one dies. Therefore, they can stretch out their distributions over their estimated life expectancy – which could be considerably longer than ten years.

Eligible designated beneficiaries are:

  • Surviving spouses
  • Minor children
  • Anyone who is disabled or chronically ill
  • Any non-spouse who is less than 10 years younger than the deceased

Some of these categories have specific requirements, so it’s important to make sure your beneficiaries meet them.

An important part of wise estate planning is ensuring that the assets you leave to those you care about help them rather than become a burden – financial or otherwise. That’s just one reason why it’s important to have sound legal guidance as you craft your estate plan.