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.