Make the Most of IRA Distributions—Carefully

When we talk to clients about “the estate” they will pass on to their heirs, that estate includes a number of components: home, life insurance, bank accounts, investment accounts, secondary properties, and IRAs or other retirement assets.  Many people consider their IRA the least of the assets in their estate, because they intend to spend down the IRA before they die, leaving nothing (or almost nothing) to pass on to their heirs. But should you die before that IRA is spent down it can end up being a significant inheritance over time to your beneficiaires,  provided you—and your beneficiaries—play your cards right.

According to this article by Dan Caplinger, one of the biggest mistakes you can make is to name your “estate”, rather than named family members, as beneficiary for your IRA:   “[B]ased on how the tax laws treat IRA money that goes through your estate, your heirs may miss out on a tax break that could save them thousands of dollars over their lifetimes.”   Caplinger’s article continues to explain what he thinks is the best way to designate a beneficiary for your IRA, and how your loved ones can spread out distributions over time to make the most out of their inherited investment.

Of course, at our firm we know that every situation is unique, and there may be times when perhaps it will be more beneficial to your purpose to distribute your IRA to your heirs through your trust or even your estate.   We therefore always recommend that you ask us or your financial advisor, or both,  before making changes that will affect the distribution of any part of your estate, and especially your IRA’s, 401K’s or other retirement assets.