Stretching Your IRA & Designating Beneficiaries

Multi-Generational Distribution Option

Stretching Your IRA: A simple way to make your money mean more to future generations

You've planned carefully for your retirement. And, the rewards for that wise planning can surface as IRA or annuity assets that you may not need. Taking only the Required Minimum Distribution (RMD) from your IRA, or owning a non-qualified annuity contract, may protect you from a sizeable tax liability and leave funds for your beneficiaries. However, receiving an inheritance in a lump sum can cause the ones you love significant tax burdens.

Your beneficiary can choose to stretch out payments and reduce the tax burden.  All you have to do is name your beneficiaries. At Amerity Financial we call this stretching your IRA.

Stretching your IRA allows beneficiaries to receive distributions over the course of their lifetime (even if you have previously started taking distributions from your IRA based on your own life expectancy). This can provide both you and your heirs with significant benefits. 


  1. Getting Started

    It's easy to stretch your IRA or non-qualified annuity for future generations. But, it's important to plan ahead.
    Here are some steps that you can take if you're interested
    in this option:


  1. 1.   Choose your beneficiaries and the percentages you'd like to allocate for them. These decisions are revocable and can be changed at any time during the owner's lifetime.

2.  Contact your Amerity Financial professional to help stretch your IRA or non- qualified plan for future generations.

To stretch your IRA, your estate should not be named as beneficiary. While some trusts allow for stretching an IRA, many do not. You should consult with an attorney who understands the Required Minimum Distribution rules if you want to name a trust as beneficiary, while retaining the ability to stretch your IRA. While the concept of stretching your IRA or annuity seems somewhat simple, we recommend consulting your Amerity Financial Professional to learn more details about stretching your IRA and your opportunities to leave a lasting legacy for future generations.


A Hypothetical Example

An annuity contract is purchased with $100,000 when the owner is a 65-year-old male. We'll assume that the IRA earns interest at a 4% rate. At 701⁄2, the owner begins withdrawing only the Required Minimum Distribution (RMD), based on his RMD Life Expectancy. This owner passes away at age 73, leaving the annuity contract to his spouse who is then age 63. She also withdraws only the RMD, which she must begin receiving at age 701⁄2. When the spouse passes away at age 72, the account value of the annuity contract is $155,945. This same scenario can be used to describe a non-qualified annuity contract, except that the owner and his spouse are not required to take out the RMD.

If the beneficiary designated in the annuity contract wishes to stretch the IRA, the withdrawals are stretched out according to his or her RMD Life Expectancy, until the account value is depleted. According to our example, the beneficiary inherits the annuity contract at age 39 and begins receiving RMD withdrawals the following year. In this hypothetical situation, the beneficiary can stretch annuity payments across 44 years.



  1. Top Beneficiary Designation Form Mistakes

  2. A beneficiary is a person or other legal entity who receives money or other benefits from a benefactor after they have passed. Naming beneficiaries should be the easiest task when it comes to estate planning, but this is not always the case. Many people get this basic task all wrong, much to the joy of ex-spouses, the IRS, and tabloids angling for a nasty inheritance scoop. Make sure your beneficiaries on your financial accounts and insurance policies are up to date, and remember your will has no jurisdiction.

    We have listed below some of the most common beneficiary designation form blunders that happen more times than not.  So, before you cross off your spouse's name, or you write your children's Social Security numbers down,
    make sure you're not making any of these mistakes:


Subjecting Your Heirs to an Avoidable Tax Bill

Another common mistake is failing to name beneficiaries on your financial accounts, insurance policies or IRA's. This enables your heirs the ability to maintain tax-advantaged growth over their lifetime (via a stretch IRA). Beneficiary forms should never be left blank. Without a beneficiary, your IRA money will go through probate court for distribution, and your family (excluding spouses) will be required to withdraw the money within five years. Most beneficiaries don't wait that long, they withdraw the entire IRA at once. By doing so, this not only incurs an immediate tax bill but also subjects all subsequent earnings and capital gains to income taxes.

Example:

On a $100,000 inheritance earning $5,000 a year, anyone in the 25% tax bracket just bought themselves an annual tax bill of $1,250.


Updating Forms Incorrectly

Marking up beneficiary forms and initialing your changes won't hold up in court. To override old designations, make changes in writing, and give a copy to the institution where the original is on file. Be sure to correctly spell out the full legal names and provide Social Security numbers, if requested of all your heirs. Remember, It's important to know your will does not change the beneficiary of your financial assets.

Naming Minor Children as Beneficiaries

Until age 18 or 21 (depending on state laws), Minors can only inherit limited amounts. Designate a financial guardian or set up a trust for the children. Either should have detailed directions on how to manage the windfall until the children are of age.

Forgetting to Update Beneficiary Designation Forms

This is basic, but unfortunately many get it wrong. Have you had any life changing event in your life, such as marriage, divorce, come of age, birth of child or grandchild, job change, retirement or death?  The Beneficiary Designation Form overthrows your will and filling it out correctly is critical. Forgetting to update when life changing events happen is just as bad as failing to name a beneficiary.

Example:

In 2001 The New York Post ran a headline declaring a “Pension Pickle!” After Anne Friedman’s $900,000 pension went not to her loving husband of nearly 20 years but to her sister, who refused to share her new found wealth. The beneficiary form Anne filled out in 1974 and never updated after she married was binding.


Not Naming a Back-up Beneficiary

If you outlive your primary beneficiary and no secondary beneficiary
is named, the court decides who gets the assets. Be exact and don't be afraid to spell out how you want your assets divided. You can name multiple primary and secondary beneficiaries or a contingent beneficiary for your accounts, by doing so you avoid probate if your primary beneficiary dies before you do and you will also avoid gift tax when passing the inheritance to the contingent.


My Living Will

Beneficiary designations always trump what's in a will, your will has no jurisdiction. Be sure to review choice periodically, especially after major life changing events. These documents should be consistent with one another.

 

Other Common Mistakes

There are plenty of other beneficiary form mistakes. Here are just a few of them:

Triggering probate on life insurance proceeds: Similarly, naming your estate and not an individual or a trust as the beneficiary of your life insurance subjects it to probate.

Disinheriting kids from a first marriage: Houses, bank accounts, and other assets held jointly go right to the co-owner, no matter what your will states, leaving children from a previous marriage no rights to contest. You can prevent them from being cut out with beneficiary designations on other assets that carry no spousal or joint ownership constraints.

Overlooking others whom you'd like to remember: Estate laws favor spouses. Payable- or transferable-on-death accounts automatically go to the closest living relative (not a charity or life partner), unless designated otherwise.

Failing to get permission to bequeath your qualified retirement plans: By law, spouses are first in line to inherit retirement funds and assets subject to right of survivorship laws. If you wish to leave the money to someone else, your betrothed must sign a written waiver, or else the deal is off at death.

Assuming your wishes are on file: Don't take it on faith that a beneficiary form you filed 30 years ago is still in some bank's file or that when you switch plans your form follows suit. Get copies from every bank, fund, and insurance company.

Keeping your plans a secret:  While alive, Anne Friedman insisted that she had updated her million-dollar pension beneficiary form. But no one could locate it after her death. Make copies and tell your executor and loved ones where they're kept.