Separate Accounting for Retirement Plan Beneficiaries

When more than one beneficiary is listed on a retirement plan, the individuals will have several options in determining how to receive distributions. These options will vary based on the relationship the beneficiaries have with the account holder and the time at which the account holder died. In any case, however, the beneficiaries will face decisions and deadlines on those decisions. As a result, if you are the beneficiary on a retirement account, you should act as soon as possible to make elections.

Separate Accounting Options

When multiple beneficiaries are listed, the options fall into a specific category that includes both multiple beneficiary plans and non-spouse beneficiary plans. When a spouse is listed as one of many beneficiaries, the spouse will have the same options as those beneficiaries. Each individual listed can establish a private account and plan in order to receive benefits. This presents a benefit to younger beneficiaries in particular. The account is distributed gradually based on life expectancy. When separate accounts are maintained, the life expectancy of each person is used to calculate payments into that account. As a result, the younger individuals can receive low payments initially to help reduce potential tax burdens early in life.

Separate Accounting Deadlines

If you decide you will be electing separate accounts, you must set up those accounts and elect this option by December 31 of the year following the year of the account holder's death. This is important because it affects how life expectancy will be calculated. The IRS has a formula to calculate life expectancy based on factors such as marital status, health conditions and vocation. A younger individual will benefit from using his or her own life expectancy as soon as possible in order to reduce a tax burden in the beginning years of distribution, so it is critical to meet this deadline.

Alternative Options

If you would like to forgo separate accounting options, then the distributions will be paid out according to the life expectancy of the oldest beneficiary. Those payments are then distributed to each beneficiary on the list proportionally. If the surviving beneficiaries are close in age, this option may present less hassle. However, it is important to remember the IRS calculation also takes into account other items. For example, a widower has a lower life expectancy than an individual of the same age who has a living spouse. 

Factors to Consider

Ultimately, the main goal of separate accounting options is reduction of tax burden. However, there are some situations in which taking the highest possible distribution each year is favorable, even if the distribution is taxed. For example, an individual who has children in college may find it important to inherit the money now as opposed to five years from now. This person may then want to use the life expectancy of an older beneficiary to determine payments, since this expectancy would be shorter and generate higher payments up front. The individual would be sacrificing the total value of potential payments through higher tax payments, however.

blog comments powered by Disqus