Divide Your IRA Into Separate Accounts - One For Each Beneficiary

If you're considering assigning multiple beneficiaries to your IRA account, watch out how the IRA beneficiary distribution rules operate. Here's an approach to make sure your beneficiaries get what you want to give them after you pass away.

Nonspouse beneficiaries who receive your IRA money are obliged to take money out of it under some particular distribution schedule; they can take it out faster than that schedule but not slower -and that's the issue...

Generally, it's best to setup the slowest distribution schedule for your beneficiary and that means the beneficiary should taking it out under a distribution schedule based on his own life expectancy. Though the beneficiary can't contribute to that IRA to make it grow, minimizing his distribution rate from it will allow it to compound over a longer time. That way he can ultimately receive more from you. With that approach in mind, let's look at beneficiary designation options.

*The case of no IRA beneficiary designation on your IRA:

If you designate no beneficiary on your IRA beneficiary form - or just yourself, then it will go through probate of your estate; otherwise, it will avoid probate. Probate significantly increases the distribution rate of its assigned beneficiaries. Here's how...

If it goes through probate, your heirs for your IRA are assigned by the probate process and can't take distributions from it based on their individual life expectancies. They must take distributions based on whether or not you've turned 701/2 and begun taking your minimum required distributions (MRDs).

If you die before 701/2, your heirs must withdraw all of their assigned IRA money within five years after you die. If, you die after 701/2, they have to take their distributions based on your remaining life expectancy which is probably a lot shorter than theirs. So be sure you designate a beneficiary on your IRA form so it avoids probate to begin with.

*Multiple beneficiary designations on your IRA:

If you leave several beneficiaries designated on your only IRA account, each beneficiary must take his share of the distributions based on the life expectancy of the oldest beneficiary. If they're all about the same age, then distribution rate will be about the same so it really doesn't matter if you maintain multiple beneficiaries. But if one beneficiary is your 68 year old sister, while the others are your young nephews or nieces, then they're all required to take distributions over a your sister's remaining life expectancy- and that's significantly shorter than the life expectancy of all those nephews and nieces. That's a disadvantage to those young people. So, here's the remedy for them...

*Designate one beneficiary per IRA account:

If you have only one beneficiary, he has the option of taking his distribution over his life expectancy. So, if you have multiple beneficiaries you'd like to leave IRA account money to, then consider splitting your IRA into separate IRA accounts - one each beneficiary.

Splitting up the accounts not only allows you to give each beneficiary the longest distribution schedule for him, but also allows you to allot how much each beneficiary will get based on how much you leave in each account. Advise them to have 'their' inherited IRA renamed as a beneficiary account in 'your name' for the benefit of 'his name'. And remember, if they always can take out their IRA money from you faster than its assigned distribution rate.

at 12:22 AM
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