Retirement Beneficiary Information
All of your retirement accounts should have beneficiary information on them. This would include your IRA accounts and your qualified employer plans such as 401k's and 403b plans. For qualified plans, federal regulations automatically designate the spouse of the retirement-account owner as the beneficiary. IRA accounts are more flexible. You can designate your spouse or anyone to be a beneficiary and each IRA could have different beneficiaries.
It's also important to name contingent beneficiaries- persons who inherit the money if the primary beneficiary is deceased. Make sure to keep this information updated.
Inheriting an Employer-Plan
Inheritance rules inside of plans such as 401ks, 403b, and 457 plans can be very complex. Some plans actually require that assets get paid to the beneficiary as soon as possible. This could trigger immediate taxes for beneficiaries who receive these retirement accounts. The beneficiary would not be able to spread-out these distributions and try to minimize taxes.
Generally, it's a good idea to get these plans into an IRA after retirement. Visit the Rollover Center on our home page. RetiremenThink Rollover Your 401k
2007 Update On Non-Spouse Beneficiary Rollovers
The Pension Protection Act (PPA) of 2006 ruling does allow a nonspouse beneficiary to rollover the inherited employer plan (401k, 403b etc.) into a beneficiary IRA account. However, a recent IRS ruling this year, IRS Notice 2007-7 provides some different rules and restrictions:
- An employer plan is not required to offer this option to a nonspouse beneficiary unless the plan is terminated
- If allowed by the employer plan, the plan must use the direct rollover method to move the assets to a Beneficiary IRA; a distribution made directly to a nonspouse beneficiary is not eligible for rollover to a Beneficiary IRA
- The Beneficiary IRA must be properly identified
- Participant and beneficiary required minimum distributions (RMDs) are not eligible for direct rollover to a Beneficiary IRA
2010 Update Non-Spouse Beneficiaries Are Now Allowed To Roll To A Beneficiary IRA Account
If you are active in an employer plan-try to understand how your plan treats beneficiaries.
Inheriting the IRA
A spouse can elect to treat the IRA as being their own.
If your spouse is designated as primary beneficiary on the account, they can roll the inherited IRA into their own accounts or simply retitle the existing IRA in their name. A surviving spouse is the only beneficiary who has this option. The surviving spouse does not have to start distributions until he or she reaches age 70 1/2
Other heirs will be treated differently:
If a non-spouse inherits a IRA account, they will be able to retitle the account as a Beneficiary IRA account. The beneficiary is required to take money out of the account each year. This is known as the "stretch-out" provision. As a general rule, after the IRA owner dies, the beneficiary can withdraw the moneys over his or her remaining life expectancy. The beneficiary’s remaining life expectancy is calculated using the age of the beneficiary in the year following the year of the IRA owner’s death, reduced by one for each subsequent year. The IRS has tables for making these calculations. The beneficiary must take the first distribution no later than December 31 of the year following the year of death.
If you are one of several beneficiaries of an inherited IRA (say you're sharing it with two siblings), separate the account as soon as possible. Each of you then can choose how to handle your own account.
Using Trusts as Beneficiary
In most cases, IRA beneficiaries should be actual, named people -- known as designated beneficiaries -- rather than simply "my estate" or "my living trust". Trusts, estates and other entities don't have life expectancies. If they 'receive' an inherited IRA, they must draw down,and pay taxes on, the entire IRA account within five years or according to distribution plan of the original owner.
Non Retirement Accounts
Your taxable individual or joint accounts are eligible to pay-on death (POD), also called transfer on death to beneficiaries. This allows individuals to avoid probate and transfer their funds directly to individuals named on an account. Most banks, mutual fund and brokerage companies allow this feature on accounts.