Choosing an IRA Beneficiary: Not Your Estate

by Stephen Benevento, CFP®

From the Summer, 2007 issue of Values

After years of personal retirement savings or the accumulation of funds in your company’s retirement plan, your IRA may be your largest financial asset. If you fail to elect beneficiaries of your IRA, the default beneficiary will probably be your estate. Besides missing out on the opportunity to specifically list who inherits the funds, there are other significant drawbacks to having your estate as the beneficiary. 
When your estate is the beneficiary, the IRA becomes subject to the probate process and the related legal complications, and the funds may be subject to any creditors of your estate. You also lose the ability to stretch out the distributions of the IRA, which provides for continued tax deferred growth. In contrast, when your spouse is the beneficiary, he or she can treat the inherited IRA as their own and wait until reaching age 70 1/2 to begin the required, but gradual, distributions. Individual non-spouse beneficiaries and qualifying trusts are required to begin taking minimum distributions by the end of the year following the IRA holder’s death, regardless of the beneficiary’s age. But these distributions are based on the beneficiary’s own life expectancy, thereby often greatly extending the life of the IRA. Since an estate has no life expectancy, the payout occurs quickly, eliminating any chance of further income tax deferral.

Be sure to elect both a primary and contingent beneficiary to ensure that your estate will not be elected by default. The institution holding your IRA will keep a record of your elections, but keep your own copy in a safe place and let the appropriate people know where it is

The information provided in the above article is for historical purposes only.  Such information may no longer be current and therefore should not be relied upon.
The information contained herein has been prepared from sources and data we believe to be reliable, but we make no guarantee as to its adequacy, accuracy, timeliness or completeness. We cannot and do not guarantee the suitability or profitability of any particular investment. No information herein is intended as an offer or solicitation of an offer to sell or buy, or as a sponsorship of any company, security, or fund. Neither Walden nor any of its contributors make any representations about the suitability of the information contained herein. Opinions expressed herein are subject to change without notice. The writings of authors do not necessarily represent the views of Walden Asset Management, its parent, or affiliated entities.

© 2007 Walden Asset Management
A Division of Boston Trust & Investment Management Company