Distribution of your Retirement Plan Assets

Whom you designate to distribute your retirement plan assets to as beneficiary hinges on a careful choice. Too often, people give little thought to the decision in designating a beneficiary for their retirement accounts, such as an IRA. The beneficiary you name can make a big difference in how the benefits will be distributed and how much your beneficiary will receive.

Traditionally, people name their spouse as the primary beneficiary and their children as contingent beneficiaries. In the alternative, the surviving spouse is named as the primary beneficiary and the person’s estate or a trust is designated as the contingent beneficiary. Each has its advantages and disadvantages.

Distribute Retirement Assets to Your Spouse

Naming your spouse as primary beneficiary provides the greatest flexibility. For instance, if an owner of an IRA has not begun taking distributions from his or her IRA prior to death, the surviving spouse can begin taking distributions from the IRA based on his or her life expectancy without any penalty.

Alternatively, the surviving spouse can postpone taking withdrawals until April 1 of the year in which the deceased spouse would have turned 70 ½ (the age at which the owner of the IRA would have been required to begin withdrawals). The surviving spouse also has the option to rollover the account assets into his or her own IRA account.

Distribute Retirement Assets to Your Children

Naming your children as contingent beneficiaries may or may not be the best arrangement. By doing so, the proceeds will be distributed to them outright. There are pros and cons to this arrangement.

The primary advantage is that the children can take distributions from the IRA based on their life expectancy. In other words, no income tax will be due until a distribution is made.

Furthermore, only the amount distributed will be subject to income tax. Generally, without any legal planning, if the beneficiary of an IRA is the IRA owner’s estate or a trust he or she established, the IRA proceeds must be distributed to the estate or the trust in an accelerated fashion, and tax deferral would be lost.

A primary disadvantage in naming children as a direct beneficiary is that if a child is still a minor, a court appointed guardian will need to receive a distribution for the minor child. Additionally, by naming a child as a beneficiary, the assets bypass any sort of trust set up for a child by the decedent’s will or revocable trust.

Designate a Trust for Retirement Assets

In order to take advantage of both the tax deferred benefits and ensuring the proceeds are held in trust for children, it is now possible, due to fairly recent law, to designate a trust as the beneficiary of a retirement account, and still keep the IRA intact so that future minimum required distributions to the trust are based on the eldest beneficiary’s life expectancy. This however, requires careful drafting to ensure the trust (whether created in a will or a revocable trust) has certain provisions required by the IRS.

These options just touch the surface of things to consider. However, the intent is to illustrate the importance of making the decision in designating a beneficiary for your retirement plan accounts.