By: Clay Wyatt
If you plan to leave your IRA to your beneficiaries (or if you die before it is empty), the IRS has specific rules for IRA distributions for your beneficiaries. Depending on each beneficiary's relation to you and how you go about listing your primary and contingent beneficiaries, the rules on IRA distributions may vary. Knowing these rules will help you determine how to leave your beneficiaries in the best possible situation.
A spouse as a primary IRA beneficiary has more options than anyone else under current IRA distribution rules. The IRA distribution rules for a spouse allow him or her to move the funds into another IRA and defer withdrawals until he or she turns age 70 ½. This option is not available to any other beneficiary. It would essentially be as if he or she assumed your role as the IRA owner and shared the same IRA distribution rules and benefits you did. The spouse can simply assume ownership of the account. He or she would have to wait until age 59 ½ to be completely free of the risk of the risk of incurring a penalty for an early withdrawal, just as you would. Keep in mind that you may be legally required to name your spouse as the primary beneficiary (or at least have your spouse sign off on having a different primary beneficiary) depending on which state you live in.
If the beneficiaries are people other than your spouse, then the IRA distribution rules require that they begin taking distributions by December 31st of the year following the year in which they inherited your IRA. According to current IRA distribution rules, they may opt to withdraw funds from the IRA over their expected life spans. Whether your primary beneficiary ends up being your spouse, children, or anyone else, they all have the option of disclaiming your IRA and passing it to any contingent beneficiaries, so be sure to name contingent beneficiaries on your IRA account.
The IRA distribution rules for estates are a bit different than for people. Your IRA will be given to your estate if you list it as a primary beneficiary or do not designate a beneficiary. If you are 70 ½ or older at the time of your death, then the IRA may be cashed out on a schedule as you would have done had you continued taking required minimum distributions. The IRA distribution rules dictate that the IRA must be completely liquidated within 5 years in all other cases.
It is best to spell out the details on your IRA beneficiary forms in order to make sure the IRA distribution rules don't make a mess of your IRA after you're deceased. Naming primary and contingent beneficiaries with specific percentages will help everyone know who gets what when the time comes and avoid unnecessary confusion as it relates to the IRA distribution rules. Remember that your spouse will have the most options and everyone else will have less. It is generally best to have at least 2 people listed as beneficiaries, as some unfortunate incident could occur, such as a car accident that claims the lives of you and your primary beneficiary, leaving the heirs of your estate to sort things out. A few minutes spent on filling out your beneficiary forms properly may save a lot of people from aggravation later on.