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May 9, 2011

Naming retirement plan and IRA benficiaries requires planning

Beneficiaries of Individual Retirement Accounts (IRAs) or a decedent’s plan become the owner of the IRA or account on the death of the participant.  Providers of plans and IRAs use different names for these accounts.  The names include: “inherited IRA”, “beneficiary IRA” or “decedent IRA”.  Some IRA providers use the name of an account that the beneficiary opens to receive the death benefit payable to the beneficiary.

The titling of the account is important.  Ownership of the account determines such matters as when the proceeds must be distributed, and eligibility for certain spousal elections.  Proceeds of the account are taxed as they are distributed.

The title should clearly indicate that the account is inherited, the name of the deceased participant, and the name of the beneficiary (beneficiaries).  Each institution has its own way of reflecting the above information. 

A nonspouse beneficiary may have the account transferred directly to an inherited IRA.  That is, the account is transferred directly between trustees.  If the proceeds are distributed first to a beneficiary, the proceeds will be immediately taxed to the beneficiary.  A spouse has additional alternatives.

Stretching out the payout of the distribution gives the beneficiary the opportunity to defer the taxation of the account.  The naming of your estate or an entity other than an individual as beneficiary will shorten the payout period.    

The above summary does not cover all the alternatives.  The objective is to indicate that naming the beneficiary of a plan or IRA has significant consequences.  The beneficiary designation for your retirement plans and IRAs should be consistent with your overall financial plan.

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