Who will inherit my IRA? – 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. [These beneficiary form issues also apply to other financial assets like checking and savings accounts, investment accounts, life insurance policies, etc.]
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If by chance you 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 depending on who the beneficiary is it actually may not be OK at all. The SECURE Act that was originally passed in 2019 and was updated in 2022 took away many of the tax deferral benefits of inheriting assets from someone’s IRA, but not all of them. For example, someone’s spouse or someone’s minor children can still take advantage of additional tax deferred benefits of inherited IRA assets. But if those assets pass through your will to your spouse or minor children, those tax deferred benefits do NOT still exist. This means that your spouse and/or minor children would have to start taking distributions sooner and thereby must pay taxes on those assets sooner.
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 73 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. The beneficiary has to immediately start taking the assets out over a maximum of a 10 year period. But if your minor child inherits those assets directly, then that 10 year period doesn’t start until they turn 21 years old. These additional years of deferring taxes and letting the assets grow can still make a huge difference in how much money the beneficiary will actually receive.
Who will inherit my IRA and how they inherit it are very important things to think about in your estate plan.
