FAQs when Naming an IRA Beneficiary

When naming a beneficiary, IRA investors often have many questions about the process. You want to make sure that you follow the rules when choosing a beneficiary. Here are some frequently asked questions pertaining to naming an IRA beneficiary.

Should I Name My Spouse as the Beneficiary?

Naming your spouse as a beneficiary can provide him or her with several unique advantages. Spouses have the most flexibility when it comes to inheriting an IRA. When you die, your spouse will have two options when it comes to dealing with your retirement funds. Your spouse can choose to roll the funds into his or her personal IRA. With this option, the spouse will be able to treat the funds as if they were his or her own. He or she will then be able to keep the funds in his or her own IRA and start taking minimum distributions at the age of 70 1/2. 

The spouse's other option is to leave the funds where they are in the inherited IRA. This will allow him or her to immediately take distribution of the funds without paying any kind of early distribution penalty. Therefore, if your spouse is going to need the funds, this might be the best choice.

What about Prior Marriages?

If you were previously married and had children with that spouse, naming a beneficiary can cause some problems. For example, if you remarried, there is a good chance that you will want to name your current spouse as the beneficiary to the account. You can also put your children from your first marriage as secondary beneficiaries to the IRA. However, when you die, your spouse could decide to remove your children from beneficiary status. Therefore, this has been known to cause some serious problems for families. If you would like to avoid this problem, you can set up a trust system in order to direct the money where it needs to go eventually.

What Happens with Non-Spouse Beneficiaries?

If you are planning on making a non-spouse your beneficiary, the process will work a little bit differently when you die. A non-spouse will not be able to roll the funds over into his or her own IRA. Instead, he or she will have to make use of an inherited IRA. With this type of IRA, he or she cannot continue investing money into the account. This is simply an account that allows the beneficiary to take distributions until the money is depleted. Your beneficiary will have to take a required minimum distribution based upon his or her life expectancy. Therefore, if the beneficiary is very young, he or she will have to take only a small payment.

What if I Want to Give Money to a Charity?

Many people who have funds in an IRA wish to donate part of the money to a particular charity upon death. You will be able to arrange for this transaction. There will not be any taxes to worry about with donations to a qualified charitable organization.

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