We’ve talked about the importance of beginning the estate planning process sooner rather than later, but there are a few things that are not covered by your will or your estate plan. Your Individual Retirement Account (IRA) is one of those aspects of your portfolio that requires additional designation and documentation in order to ensure that the funds are properly passed on to your heirs.

 

Name a Beneficiary

When you open an IRA, you should always fill out a beneficiary form to indicate who can receive your funds after your death. The form can be changed at any time during your life, so you never have to worry about changes in your marriage status or family situation. Once your beneficiary inherits your IRA, they have several options to manage the remaining funds.

 

Once your beneficiary inherits your IRA, they have several options:

  • Keep the IRA as is. This will let your beneficiary receive the same benefits you already enjoyed with the account. If you start taking the minimum distributions, your beneficiary will be able to continue receiving those funds regardless of their age without paying an early withdrawal fee.
  • Roll the IRA to another account. Your beneficiary can also roll the funds of the inherited IRA into a new or pre-existing IRA in their name. However, the IRA can only be rolled over into an IRA of the same type.
  • Convert the funds to a Roth IRA. If your beneficiary thinks they may be in a higher tax bracket later on, they can convert the inherited traditional IRA into a Roth IRA.
  • Give up the assets. Your beneficiary has the right to decline the inherited IRA, whether in whole or a portion of it. If they decline the assets, the remaining portion goes to other beneficiaries on the account.
  • Cash out the IRA. Your beneficiary has the option to cash out the IRA. However, if they’re under 59½, they will have to pay the 10 percent penalty on early withdrawal. They will also have to pay any applicable taxes when they cash out the account.

 

At Black Harbor Wealth Management, we will help you manage your wealth, so you can spend more time worrying about your next vacation than worrying about your retirement. Contact us today for a free consultation.