When opening an Individual Retirement Account (IRA) the documentation requires you to nominate a beneficiary upon your death, other types of account do not typically ask for this information. Your beneficiary can be anyone you choose: Spouse, children, grandchildren, your estate, friend, charity, trust etc… However, who you choose can have a significant impact on the great tax deferred benefits that IRAs offer. The key is to make sure that the beneficiary nomination is completed. If blank, your IRA will become part of your estate and be distributed per your will. That sounds straightforward but is a crucial error. Firstly, the IRA will be swallowed into the probate process. Secondly you potentially forfeit significant tax-deferral advantages. Nominated IRA Beneficiaries have the option to liquidate and pay the taxes outright (not ideal) or ‘stretch’ the minimum required distributions over their lifetime and preserve the tax-deferred status of the pool of assets. Therefore, younger beneficiaries, if financially responsible, can be good options i.e. children if your spouse is already secured financially. The calculations involved to demonstrate the benefits are beyond the scope of this Insight, but the bottom-line is ensure that the beneficiaries on your IRA documentation are clearly stated and they are up-to-date, those previously divorced take note. Diligently updating your will does not necessarily ensure your intentions for your IRA assets are fulfilled.
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