Beneficiary IRAs

In addition to eternal happiness, marriage provides countless financial advantages, including:

- - Possible Tax Reduction
  - The ability to contribute to a spousal Individual Retirement Arrangement (IRA) account
  - Sharing living expenses

The topic of this week’s post discusses yet another advantage available to married couples: assuming an IRA.

Beneficiary IRAs

When an IRA account is opened, the account owner names a beneficiary. The beneficiary receives the assets inside the IRA account in the event of the account owner’s death – assuming that the IRA beneficiary designations are up-to-date.

The account beneficiary could then open an inherited IRA account, with themselves as the beneficiary. With an inherited IRA account, the beneficiary must make the required minimum distributions (RMDs) each year.

One disadvantage of an inherited IRA account is the impact of immediate RMDs on tax-deferred growth. Were the account beneficiary to postpone RMDs, the entire account balance would grow tax-deferred – as opposed to the balance of the assets after the RMDs. Consider an example:

Pompeia passed, leaving $1,000,000 in her IRA account to her spouse, Caesar. Caesar creates a beneficiary IRA account. RMDs are processed each year. Assuming a 5% return and a 39.6% tax bracket, Caesar’s take away after 30 years is $2,354,817. Had Caesar been able to postpone all distributions over the same 30 years – taking advantage of tax-deferred growth – Caesar would be looking at $2,610,453, or a difference of $255,637.

Assuming an IRA

Spouses, however, do not have to treat themselves as the beneficiary.

Creating an inherited IRA account – described above – is just one option (among two) available to spouses inheriting an IRA account. Unlike non-spousal beneficiaries (i.e. children, or anyone else), spouses have the option to treat inherited IRA assets as their own. This can be accomplished by either:

- 1. Naming themselves as the account owner
  2. Rolling over the assets into their own IRA account

By executing the above, the spousal beneficiary is able to take advantage of the tax-deferred growth feature available in a traditional IRA account. Since the assets are placed in the spouse’s own IRA, RMDs will be postponed until the spousal beneficiary reaches age 70 ½.

While the above allows a spouse to delay distributions – taking take advantage of tax-deferred growth – delaying distributions may not always be the most appropriate strategy. Consideration must be given for the individual’s particular situation.

This is where advanced financial planning comes into play; important variables in electing a particular beneficiary strategy includes:

- - Existing and future tax brackets
  - Liquidity Needs
  - Income Needs

If you find yourself in a position where you are given the opportunity to elect between the various beneficiary IRA account options available, work with a fee-only financial planner to determine the best solution.