Do you expect to be the beneficiary of an IRA or retirement plan? Maybe you are in the process of a review of your IRA or retirement plan beneficiaries and want to make good decisions based on current legislation. The rules changed with both the 2019 SECURE Act and the SECURE 2.0 ACT of 2022 so it is a good time to pull out your records and see if you need to make any changes.

Before we look at the rules for inheriting, let’s review who can be a beneficiary.

Beneficiary Designations

A beneficiary can be any person or entity – such as a trust or charity – you choose to receive the benefits of a retirement account or IRA or other asset after you die. You can name multiple beneficiaries for one account but then must specify percentage allocations to each beneficiary.

If you are married and participate in your employer’s ERISA covered retirement plan, such as a 401(k) or pension plan, your spouse must generally be the beneficiary of that company plan unless the spouse signs a waiver or consent form to allow a different beneficiary.

Assets other than retirement accounts may also carry a beneficiary designation if so desired, and that might make sense, for example, if you are a single person and own assets titled in your name only. A “transfer on death (TOD) or payable on death (POD)” beneficiary designation may be added to bank accounts or taxable brokerage accounts.

Check with the firm that handles your banking and/or investments and make sure that it is appropriate for your situation. Real property, such as your home, may also carry a beneficiary designation in the form of a beneficiary deed; however; every state has its own rules and process.

It is wise to consult a legal, tax, or financial advisor so that you understand all the pros and cons before you make beneficiary designations or changes. For example, assets with TOD or POD beneficiary designations do not go through probate but they may be subject to creditor claims during your lifetime, or during probate if there aren’t enough assets to pay debts of the estate.

Inherited IRAs

Let’s imagine that your father recently passed away. He had both a Traditional and a Roth IRA. Your mother is the only beneficiary of the Traditional IRA, and you are the only beneficiary of the Roth IRA. You and your mother have different choices and rules to follow as beneficiaries.

Your mother, the spouse of the deceased and an eligible designated beneficiary, has one set of options, and you, a non-spouse designated beneficiary, have another set of options.

The rules for if/when you must begin taking required minimum distributions and/or distribute all the account assets depend on your beneficiary classification:

• Eligible Designated Beneficiary (spouse or minor child of the original account holder, or an individual that is disabled, chronically ill or no less than 10 years younger than the original account holder)
• Designated Beneficiary (most other individuals)
• Non-Designated Beneficiary (trusts and organizations)

The SECURE Act, which went into effect on January 1, 2020, came with several changes for inherited IRAs. If the IRA account holder died on or after January 1, 2020, and you inherit their IRA, you’ll now generally have 10 years after the account holder’s death to withdraw all the money. Otherwise, you’ll face a penalty on any money remaining in the account. However, this rule does not apply to those listed above as eligible designated beneficiaries. They have other options.

There are additional nuances based on your exact relationship to the deceased, when they died, and their age at the time of their death. If the deceased died before January 1, 2020, there are still different rules. The best thing either one of you can do is to talk to both your tax and your financial advisor before you do anything. You do not want to create undesired tax consequences with decisions made too quickly.

By the way, make sure your father took his required minimum distribution for the year of his death, if it was required. If not, it must be taken before any distribution of assets to beneficiaries otherwise penalties could apply.

Beneficiary designations and inherited IRAs can be complicated. Please take your time and ask questions so that you fully understand your choices and their tax ramifications so you make informed decisions that will benefit both you and your heirs.

Let’s Have a Conversation:

What surprises have you encountered with inheriting assets? How recently have you and your spouse/partner reviewed your asset beneficiaries? Have you had a conversation with your beneficiaries so they are aware of their inheritance?