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Thoughtfully Designating a Beneficiary of an IRA is Critical

The SECURE Act (“Setting Every Community up for Retirement Act of 2019”) went into effect in 2019, followed by the Securing a Strong Retirement Act of 2021 (“SECURE II”), changing the way that Individual Retirement Plans (“IRAs”) are governed.

It is important to understand how the current legal framework operates in order to thoughtfully designate beneficiaries of retirement plans. IRA assets are pre-tax and therefore subject to income tax at the time of distributions. By elongating the time period during which one receives distributions, negative beneficiary income tax consequences may be mitigated.

Under current law, if an IRA owner fails to designate an “individual beneficiary” and dies prior to reaching the age of required minimum distributions (72), the IRA must be fully distributed in 5 years. If an owner designates an individual beneficiary, other than an “eligible designated beneficiary,” the account must be fully paid out within 10 years. If, however, an eligible designated beneficiary is designated, the account may pay out over the beneficiary’s own life expectancy.

Therefore, in order to make the most out of an inherited IRA for income tax purposes, it is critical that IRA owners review their beneficiary designations and, if possible, name an “eligible designated beneficiary.”  Our experienced estate planning attorney can assist in evaluating your retirement assets and planning for the best possible results for your heirs.

This material in this article, provided by Chauvel & Glatt, is designed to provide informative and current information as of the date of the post. It should not be considered, nor is it intended to constitute legal advice.  For information on your particular circumstances, please contact  Chauvel & Glatt at 650-573-9500 for legal assistance near you. (photo credit: Depositphotos.com)


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