An ideal retirement plan will outlast the retiree – so what happens to your IRA when you pass? Your designated beneficiary will inherit it, along with some potential issues.
When a beneficiary inherits your IRA, unless it’s a Roth, they will be subject to the Required Minimum Distribution rules under the Tax Code. Required Minimum Distributions (or RMDs) are calculated amounts of distributions that a beneficiary must take from an inherited IRA (or other retirement account subject to RMD rules) to avoid a 50% tax penalty. Better to pay payroll tax than an RMD penalty, right?
A common mistake made with inherited IRA’s is failing to split the IRA by the end of first RMD year in cases where the IRA is given to more than one beneficiary (i.e., several children). The purpose of the split is to take advantage of the stretch IRA based on each beneficiary’s own life expectancy. If the split is not done by year-end, then the RMD will be based on the age of the oldest beneficiary (making it larger than it should be for the younger beneficiary(ies)).
Proper Estate Planning requires attention to retirement accounts and beneficiary designations.
Paul Yokabitus is the CEO and Managing Partner of Cary Estate Planning, a Cary, NC, estate planning law firm. With years of experience in estate and elder law, he has zealously represented clients in various legal matters, including estate planning, guardianship, Medicaid planning, estate administration, and other cases.
Paul received his Juris Doctor from the Campbell University School of Law and is a North Carolina Bar Association member. He has received numerous accolades for his work, including being named among the “Best Attorney in Cary” in 2016 and 2017 by Cary News and Rising Star in 2020-2023 by Super Lawyers.