Retirement plans are wonderful assets to pass onto your beneficiaries. They are tax shelters that can continue to provide tax benefits (known as “stretch” strategies) for two generations. Tax sheltered money grows faster than taxable money. Careful attention to the rules is important so that the tax benefits are maintained. Spouses have more options and flexibility than non-spouse beneficiaries. Beware of these pitfalls for non-spouse beneficiaries:
- Required Minimum Distributions (RMD)
IRA owners can delay their RMD’s until age 70.5 but non-spouse beneficiaries must start their RMD’s the year following the death of the IRA owner, this includes inherited Roth IRA’s. The beneficiary’s life expectancy is used. A 50% penalty is due on the amounts not taken that should have been.
- Proper titling of the IRA
While spouses can elect to “rollover” the IRA into their own name, non-spouse beneficiaries must set up a separate account with a title that includes the decedents name and the fact that the account is for a beneficiary. For example Mom Smith (deceased 6/1/xx) for the benefit of Son Smith. Make sure each beneficiary sets up their own separate IRA and name new beneficiaries (who do not get to recalculate the RMD’s should the beneficiary die prior to spending down the account)
- Separate accounts for each beneficiary
Each beneficiary should set up their own separate account especially if the age of the beneficiaries is materially different, as each beneficiary may have different ideas on how quickly to spend the IRA. Since the life expectancy of each beneficiary is used, a young beneficiary would gain extra years (and less immediate RMD’s) of tax deferred growth if the older beneficiary’s life expectancy is to be used, which is always the case with multiple beneficiaries.
- Non-natural person beneficiaries (charitable beneficiaries)
The naming of a non-natural beneficiary forces all beneficiaries to empty the IRA within 5 years of death unless the charitable beneficiary receives their share of the IRA by 9/30 of the year following the death of the IRA owner. This is not true with a properly drawn “Stretch IRA” trust which is most useful for young beneficiaries who might need protection and professional management by a more mature person.
For further review of your Retirement Plan beneficiaries, Don can be reached at firstname.lastname@example.org.
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Don is a Certified Financial Planner (CFP) and has been in the advisory business since 1987. He is a founding partner of Planning Solutions Group, which was formed in 2001. Planning Solutions Group is a leader in family wealth management comprised of 30 employees and over 1,500 clients with offices in Maryland and Virginia Beach. Don’s practice focuses in the areas of wealth management, business continuity planning, fringe benefit design, and estate planning.
Don is a frequent speaker/educator who empowers high net worth business owners. He provides educational workshops and seminars throughout the nation at Colleges, Universities, Clubs, and Associations including Christopher Newport University, Montgomery College, and Johns Hopkins University. He has been a featured speaker for many trade associations including, the DC Bar, Associated Builders & Contractors, Johns Hopkins University-Physicians, Maryland Dental Association, Intermodal Association, National Electrical Contractors Association, Printing & Graphics Association, Virginia Association of Roofing Professionals, and Air Conditioning Contractors Association, and Northeast Equipment Dealers Association. Don is a regular instructor at the NADA (National Automobile Dealers Association) Academy helping dealer candidates and family businesses transition to the next generation. He has been a guest on CNNFN’s TV show for Entrepreneurs Only, as well as a radio guest on WTOP, WEAA, WPGC and on WBAL Radio’s Ron Smith Show.
Don sits on the Board of Hampton Roads Financial Planning Association. He volunteers for the “500 Financially Fit Families Program” in Virginia Beach helping mentor citizens on budgeting and paying off debt. He formerly sat on the Board of Directors for the Johns Hopkins Bayview Burn Center and is a former Board Member of the Easter Seals Foundation of Central Maryland. Don is also the past president of the board of trustees at his church. Don has been recognized as a Five Star Wealth Manager for two consecutive years.