IRAs are one of the most valuable assets owned by most Americans. Unfortunately, few people conduct an annual review of their IRAs. An annual review is an important step in maximizing the long-term value of your IRA. In this visit we examine the essential steps for a 2010 IRA review.
Beneficiaries. Financial and estate planners remain amazed at the number of people who don’t review their IRA beneficiaries. Most folks name the obvious person (a spouse or their children) as beneficiaries when opening the IRA. They don’t give the beneficiary choice another thought after that, and many people can’t name for sure who their beneficiaries are. Remember, your will, living trust, or other parts of your estate plan don’t affect who inherits your IRA. The person named on the beneficiary designation form with the IRA custodian is the one who inherits the IRA.
Review your IRA beneficiary choice. When an IRA is sizeable, the beneficiary designation is an important part of your estate plan and may even be the most important part of your estate plan.
It is important that some individual is designated as beneficiary. Otherwise, the IRA must be emptied within five years of your passing. The tax deferral won’t be available to your loved ones. This is true even of a Roth IRA. You also don’t want to designate your estate as beneficiary, because it has the same result. The IRS would have to be emptied within five years.
Owners of valuable IRAs frequently name more than one beneficiary, including children and even grandchildren. If you’ve done that, be sure to review the language. Some people name specific beneficiaries. In that case, you have to revise the form whenever there is a birth or death of a child or grandchild.
Other people use general phrases such as “all of my children equally.” This can raise issues when an adult child passes away. Does that child’s share go to the other children, or do the children of that child inherit his share? Clear language in the beneficiary designation avoids such issues. Your estate planner can help with the language.
When more than one person is beneficiary, it is a good idea to have your estate planner write a custom beneficiary designation form. This ensures the IRA is distributed exactly as you want. The estate planner works with the IRA custodian so the format and language meet the custodian’s requirements.
Splitting accounts. When heirs jointly inherit an IRA, they are allowed to split it into separate IRAs for each of them. That allows each beneficiary to use his or her own life expectancy to determine minimum required distributions for life. It also allows each beneficiary to determine the investment strategy and the policy for taking distributions above the minimum.
Yet, you may want to split the IRA now and name a single individual beneficiary for each. Doing so avoids conflicts among the beneficiaries after your passing and ensures the split actually occurs. It also allows you to tailor the amount inherited by each beneficiary. A risk is the IRAs may earn different rates of return in the future, resulting in different inheritances than you expected. That’s a problem if your goal was equal inheritances, but you could avoid it by investing the IRAs in the same assets.
Required minimum distributions. RMDs are back this year after a one-year suspension in 2009. If you are over age 70½, you have to take an RMD this year. We discussed details in the February 2010 visit. Review the article or IRS Publication 590 to be sure you take the right RMD in 2010.
Consider a conversion. We’ve covered the many angles of converting a traditional IRA into a Roth IRA in recent past visits. Decide whether a full or partial conversion of a traditional IRA into a Roth IRA in 2010 is for you. Also decide if you want to pay taxes on the converted amount on your 2010 return or split equally between the 2011 and 2012 returns.
When converting you also should consider strategies such as converting each investment in a traditional IRA into a separate Roth IRA. That way, you can recharacterize (reverse the conversion) the investments that lose money after the conversion and keep the rest in their Roth IRAs. Review our IRA Watch Archive on the web site for details on these strategies and the factors to consider.
Look out for your heirs. Those who inherit IRAs have many options for handling their new IRAs. They need to make decisions, and most of the decisions are irreversible. You want to be sure your heirs have good advice about their options so they make the right choices. You can leave them written materials and suggestions or be sure they know the name of your advisor for these issues. The law can change quickly, and they may need personal guidance.
April 2010. RW
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