Do You Have The Right Beneficiaries For Your Ira?

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Do you invest in either a traditional or Roth IRA? If so, you're making a smart move, because an IRA offers you a tax-advantaged way to save money for retirement.

Of course, you want to save as much as you can, because you could spend two or even three decades as a retiree, but, if you don't use all your IRA funds, what will happen to them?

It's up to you -- but your decision can have a big impact on your family, so you'll want to plan carefully.

The dispersal of your IRA depends on the beneficiary or beneficiaries you've named. When it comes to designating beneficiaries, you have several choices. Here are some of the most common ones:

Designate your spouse

If you select your spouse as beneficiary, you are providing him or her with considerable flexibility in what to do with the money. That's because your surviving spouse can roll over the IRA assets into his or her own IRA. This allows your spouse to name new beneficiaries and postpone taking required minimum distributions until he or she reaches age 70-1/2.

You can designate a child, grandchild or nonspouse beneficiary.

If you name a child or grandchild as your IRA beneficiary, that person can take distributions based on his or her own life expectancy.

If the beneficiary is a young person, the distributions can then be "stretched out" over a long period, which can help enhance the potential tax-deferred growth of your IRA assets.

Trust as a beneficiary

You don't have to name a human being as your IRA beneficiary -- you can name a trust, which is a legal arrangement giving you great control over how, and when, the IRA assets will be distributed.

By designating a trust as beneficiary, you can accomplish any of several goals.

For example, if you have remarried, a trust can provide a lifetime income stream to your current spouse, with the remaining assets ultimately passing to your children from an earlier marriage.

A trust can also let you decide when your children or grandchildren can receive the assets in your IRA, and how much they can get at any one time.

In addition, a trust can enable you to make charitable gifts while gaining tax benefits. (To create a trust, which can be a complex instrument, you'll need to consult with your legal adviser.)

Multiple beneficiaries

If you'd like to split your IRA among several children, you can name them all as beneficiaries. Once you die, the life expectancy of the oldest beneficiary generally will be used to determine the payout period for all the beneficiaries.

However, each beneficiary can choose to create his or her own IRA, called an "inherited IRA," as long as all these separate accounts are established by December 31 of the year following your death.

The inherited IRA owners can then take distributions based on their individual life expectancies.

Your financial and legal advisers can assist you in choosing appropriate IRA beneficiary designations.

Take the time to choose wisely. After all, you've worked hard for many years to build your IRA, so you'll want to make sure it ends up in the right hands at the right times.

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