Your IRA in Estate Planning
By Cody Allen, CRSP
President
When it comes to planning your estate, your IRA (Individual Retirement Account) deserves special attention. While many people focus on wills, trusts, and real estate, your IRA is one of the most powerful—and sometimes overlooked—tools in passing on wealth to your loved ones.
Done right, your IRA can provide tax advantages, avoid probate, and offer long-term benefits for your heirs. Here’s what you need to know about estate planning for your IRA.
1. Start with the Beneficiary Designation
The most critical component of IRA estate planning is your beneficiary designation.
- Primary and contingent beneficiaries: Always name both. If your primary beneficiary predeceases you, the contingent takes their place.
- Avoiding the estate as a default: If no beneficiary is named, or if all listed beneficiaries are deceased, your IRA could go into your estate, potentially triggering unnecessary probate and tax complications.
2. Understand the SECURE Act Rules
The SECURE Act of 2019 changed the game for IRA inheritance. Most non-spouse beneficiaries must now withdraw all assets from an inherited IRA within 10 years—known as the 10-Year Rule. Understanding how these rules affect your heirs can help you plan better and possibly reduce their future tax burden.
3. Consider a Trust for More Control
If you’re concerned about how your beneficiaries will manage a large IRA inheritance—or if you want more control over how the money is used—you might consider naming a trust as the IRA beneficiary. Be cautious, specific trust language must be included to ensure tax efficiency.
4. Plan for Tax Implications
IRAs are funded with pre-tax dollars (for traditional IRAs), meaning your heirs will owe income taxes when they withdraw the money. Proactive distributions strategies can minimize the tax impact:
- Roth conversions: Converting some or all of your traditional IRA to a Roth IRA means your heirs may receive tax-free distributions.
- Strategic withdrawals: Taking withdrawals during low-income years may reduce the taxable estate and future RMDs.
5. Coordinate with Your Overall Estate Plan
Your IRA should work in harmony with your broader estate plan. Be sure your will, trust, and financial documents align with your IRA designations.
To learn more about developing a robust estate plan for your IRAs, please join us on May 20th for our program titled, What Happens to My IRAs When I’m Gone? Contact us to RSVP today.