New York Estate Planning & Elder Law Blog
Unfortunately, traditional social security often doesn’t provide the means for seniors to live comfortably after they retire. The cost of living often rises quicker than adjustments can be made to social security allowances. There are many different types of retirement savings strategies to help supplement your retirement income so that you do not have to rely solely on social security. One such strategy is an Individual Retirement Account, or IRA, which is a type of retirement savings account where you can contribute funds for your own retirement. The two main types, traditional IRAs and Roth IRAs, differ in how they are taxed but offer the same basic benefit: supplemental retirement income. However, it is important to be aware of what happens to an IRA when the person who owns it passes away.
When the IRA Has a Valid Beneficiary
Typically, an IRA is a non-probate asset. That means that all you usually need to distribute an IRA upon death is a valid beneficiary form. In cases where a valid beneficiary form has been filed with the administrator of your IRA, then there is usually little issue ensuring that the IRA transfers to that beneficiary. In these cases, a beneficiary to an IRA that has not yet reached 70 ½ years of age can choose to withdraw the entire amount of the IRA within five years of the owner’s death. After a certain age, a beneficiary may have to make periodic withdrawals as the owner would have had to do, or they may choose to do this to stretch the funds within the IRA over a longer period. With a traditional IRA, the beneficiary withdrawing it will need to pay taxes on the amount of the IRA. Tax consequences of a Roth IRA can be different, and you should consult with an investment planner or estate planning attorney to find out more about rules governing their distribution.
When the Beneficiary Is Your Spouse
Spousal beneficiaries have another option available to them. They can roll over the funds within the IRA to an IRA in their own name. After the rollover, the IRA will operate for them in the same way that it operated for the previous owner and will be governed by the same rules about distribution. As with other options, there may be tax consequences to this that should be discussed and planned for.
Other Circumstances
However, there are three relatively common circumstances in which the transfer of an IRA can be somewhat more complex. These include:
- If a valid beneficiary form has not been filed;
- If a beneficiary is not valid because of predeceasing the owner or other circumstances; or
- If the IRA lists the deceased person’s estate as beneficiary.
In these circumstances, the deceased person’s Will will govern how the IRA is to be distributed upon death.
In any of the above circumstances, it is important to ensure that all appropriate paperwork and related documentation for the IRA is in place. It is also important to ensure that this documentation is updated after an owner’s death so that it reflects the appropriate future of the IRA. An experienced estate planning attorney can help you review your options when it comes to IRAs as well as help you ensure that your wishes with regards to your IRA are carried out effectively.