Ask Mary Beth: Money Q & A |
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Spouse has most flexibility as IRA beneficiary
I am confused about the difference between naming my spouse
and naming another beneficiary to my IRA. I was given to
understand that my wife automatically receives the IRA when I die
but the beneficiaries will get it after her death. How do you
set up your IRA so that the adult children can continue the IRA
without penalty?
Mary Beth answers:
Rules about IRA beneficiaries are very complicated and I
suggest you get a copy of IRS publication 590 for all the
details. You can also visit the IRS Web site for information.
In a nutshell, you can name your spouse as the primary
beneficiary of your IRA and your children as the secondary
beneficiaries in the event your spouse predeceases you. Your
spouse is often your best bet because she can roll over your IRA
funds into hers, can make deductible IRA contributions to that
account, and can leave the funds in your name and not have to
begin taking distributions until you would have reached age 70
1/2.
Your children will be subject to stricter rules dictating how soon after
your death they need to withdraw the funds. There are ways to
stretch this out, but the rules are complicated and the
timetables very strict. Beneficiaries of an IRA must pay taxes on
the distributions just as if they were the original owners. In
addition, the account balance of your IRA is included in your
gross estate for federal estate tax purposes. Federal estate taxes currently
don't apply to estates under $600,000. Next year the estate tax
threshold goes up to $625,000 and it will eventually be raised to
$1 million by 2006. Federal estate tax rates begin at 37 percent
and go as high as 50 percent depending on the value of the
estate.
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