If you have an IRA, you most likely have filled out a beneficiary form that dictates where those assets will go upon your death. And if this is the case, then your IRA assets will get distributed outside of the probate process. Nothing in your will can change that. So you need to keep this in mind when you are deciding the terms of your will. If you don’t, then you may unintentionally be distributing your estate very differently than you had thought. This is especially true if your IRA contains a significant proportion of your assets.
If you by chance haven’t filled out a beneficiary form, then the wording in the contract you have with the IRA custodian will dictate where those assets will go. The terms of these contracts can be very different from custodian to custodian, but most of them say that the assets will pass to your estate.
You might be thinking this is OK, but actually it isn’t. When the IRA passes to an actual person, then he or she will be able to take advantage of rules that allow those assets to stay in an IRA for longer to take advantage of growing with deferred tax consequences.
Often the ideal beneficiary is a spouse, because a spouse can rollover their deceased spouse’s IRA into their own and postpone distributions until they turn 70 ½ if they so choose. By that time the assets could potentially be worth a lot more.
But even if you were to leave these assets to your kids, that would be much better than leaving it to your estate. If it goes to your estate, then the tax deferral benefits get minimized. A Roth IRA must be withdrawn within five years. The same goes for a traditional IRA unless the prior owner was already 70 ½ or older. If that’s the case, then the distributions requirements are based on the age of the person who died.
If you leave the assets to your kids or anyone else, then the required minimum distributions are based on the life expectancy of the beneficiary. This can potentially stretch out the payments over many more years, thereby taking advantage of additional tax deferred growth of the assets.