An Individual Retirement Account, IRA, is a personal investment account intended for retirement savings that provides various tax advantages. The Internal Revenue Service, IRS, has created a list of regulations regarding IRA accounts that are outlined in IRS Publication 590. One of the many advantages the IRS grants IRA owners is the ability to designate your own beneficiaries. This designation can help you better organize your financial affairs and assist with estate planning.
Avoiding Probate
If you die without a will, your estate goes through a legal process known as probate, in which the state essentially decides who receives your possessions. Similarly, if you die without a beneficiary named on your IRA, your IRA will have to pass through the probate process. As probate can be a lengthy, expensive, and public process, designating a beneficiary on your IRA is a prudent estate planning move.
Percentage Distributions
When you select beneficiaries for your IRA, you are allowed to choose the percentage of your assets that should be distributed to each individual beneficiary. This is a powerful tool if you want to include someone as a beneficiary but do not necessarily want them to receive an exorbitant amount of money.
Spousal Beneficiaries
One of the most advantageous features of an inherited IRA is the ability of your spouse to treat the inherited IRA as her own. Unlike any other beneficiaries, a spousal beneficiary can retitle an inherited IRA into her own name, make contributions, rollover assets and designate new beneficiaries. Failure to designate your spouse as your IRA beneficiary could result in unintended consequences if the assets pass to the probate courts for distribution.
Contingent Beneficiaries
In the event that your primary beneficiaries predecease you, contingent beneficiaries on your IRA are the only way to avoid probate for your IRA. Even if that seems to be an unlikely scenario, the ability to plan for this situation is an important benefit of being able to designate IRA beneficiaries.
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