Helping Your Family means you don’t have to spend much time learning about IRAs and other retirement plans to know the rules can be extremely complicated. But even if you aren’t an expert on the subject, if you know the basics, you can use the rules to your advantage to avoid hassles and even unnecessary taxation while you are alive, and for your family after you pass away.
Prepare Your Beneficiaries for Your Death
Who wants to talk with their loved ones about dying? Add a discussion about retirement plan distributions and you have the recipe to ruin a good Thanksgiving dinner. But there are things you should discuss with your loved ones prior to your death about your IRAs and other retirement plans. First, make sure you and your family are familiar with the IRS rules regarding retirement plans. You don’t have to know the details, but you should be familiar with the basics.
Second, realize IRA rules are complicated, and it is easy to make serious mistakes that cause unnecessary hassles and taxes. Discuss these issues with your financial advisor and your attorney. Make sure your family members know and are familiar with the professional advisors who are assisting you.
Third, discuss your estate plan, including your goals and objectives, with your family. If you are married, talk with your spouse about how you would like your estate, including your retirement plans, to be handled after your death. Realize that circumstances change over time, and your plan may have to be revised from time to time.
Special rules for Roth IRAs
While most retirement plans grow tax deferred, Roth IRAs are a special breed which grows tax free. There are other benefits of Roth IRAs, such as not having to take any distributions during your lifetime. After you pass away, the beneficiaries of your Roth IRA can also take tax free distributions. If you plan correctly, a Roth IRA can be an extremely valuable asset to leave to your loved ones which can bless many generations. Whether to create a Roth IRA is an issue you should discuss with a financial advisor, such as Morris Hall Financial.
Avoid the Deadly Traps for IRAs
So, what are the deadly traps for your IRAs? First, and foremost, is not reviewing your IRA beneficiary designation forms on a regular basis. You know your will and trust should be reviewed regularly, but have you thought about making sure your beneficiary forms are reviewed? These important documents will control the disposition of your retirement plans, not your will or trust. Make sure you have the right beneficiaries, and update the beneficiaries as your personal circumstances change.
Second, you can mess up your IRAs by failing to name any beneficiary at all. If you fail to name a beneficiary, or if your named beneficiary is deceased, then your estate is the beneficiary of your IRA. When that happens, your IRA is subjected to the probate process, and your heirs may have to pay income tax on your IRA all at once.
Third, many people who create trusts name their trusts as beneficiary of their IRAs. Your trust can provide significant protection for your loved ones following your death if it is set up properly, but it can also create a tax trap for your IRA. If your trust is not a qualified trust, designed specifically to receive your IRA following your death, then the trust will cause your IRA to be taxed immediately following your death-a costly mistake for your heirs.
Consult an Attorney
As you can see, there is a lot to think about when planning for IRAs and other retirement assets. This isn’t a do-it-yourself project, to make sure you consult with an Morris Hall estate planning attorney. Because of their experience handling complex estate planning matters, including IRAs, MH attorneys can advise you about the most efficient options for your IRAs so your beneficiaries can avoid unnecessary hassles and taxes when receiving inherited IRA funds.
