Did you know that there’s a difference between a beneficiary and a designated beneficiary when it comes to your IRA? It’s true, and it’s important that you know the difference between the two. If you want to have your children, family members and heirs benefit from your IRA and dodge costly missteps, you need to make sure that they are formally designated beneficiaries.
The beneficiary of your IRA can be a legal entity, like a charity, or an individual. However, a designated beneficiary has to be a living person and not an organization or legal entity. A designated beneficiary can stretch distributions from the IRA over the course of their lifetime and benefit from tax-favored investment returns. By naming a designated beneficiary, you will also be able to avoid probate and instead have the account pass directly to the person named.
Why a Designated Beneficiary is Valuable
Let’s give an example of this theory in practice. James leaves his IRA to a beneficiary, his estate, and dictates in his will that the proceeds should be given to his granddaughter Beth, who is 22 upon his death. The estate does not count as a designated beneficiary because it is not a living person. Therefore, the IRA has to be paid out to the estate over a period of time. If James already took annual required minimum distributions, the IRA would be paid out over the projected life expectancy at his time of death. If not, the IRA would have to be paid out over 5 years.
If Beth would have been named as the designated beneficiary, that IRA would be paid out in accordance with her own life expectancy, offering a great deal of tax benefits over that time.
Probate Adds Up
Another issue complicates things when a designated beneficiary is not named. Probate comes with a whole host of other problems, including:
- Delays throughout the time-consuming process
- Loss of confidentiality, as probate is a public process
- The possibility of a will being contested
- The lack of a will at all
To escape all of those potential issues, you should name a designated beneficiary.
Don’t Wait Until It’s Too Late to Name a Designated Beneficiary
If you aren’t sure how to name your beneficiary or what the potential tax benefits of naming one are, you should contact Miles Tax Advisory today. We can work you through all of your options and help you determine what to do. We are always here to assist you!