DEFINITION of ‘IRA Asset Will’
An IRA asset will is a document that specifies how the assets in an Individual Retirement Account (IRA) should be distributed upon the account owner’s death. It is used instead of a financial institution’s boilerplate beneficiary designation forms to provide a greater level of detail about how retirement account assets should be distributed.
BREAKING DOWN ‘IRA Asset Will’
IRAs have unique features, restrictions and tax implications that require them to be handled differently from other assets in an individual’s estate. The IRA asset will addresses these features to ensure that an individual’s wishes will be carried out after his or her death, and that the maximum value of the IRA’s assets will be preserved.
Estate Planning and IRAs
The assets in IRAs, compounding over the decades, can be a key part of an estate plan. Naming beneficiaries is important to this effort.
An individual who inherits IRA assets from the original IRA owner is referred to as the first generation beneficiary. This individual is able to distribute the assets over his or her life expectancy or the remaining life expectancy of the IRA owner. If the first generation beneficiary subsequently dies, his or her designated beneficiary is the second generation beneficiary. This type of IRA is used by those who no longer need – or want – to spend all of their IRA assets at the same time. Extended IRAs can have extensive tax benefits because second generation beneficiaries are allowed to continue distributions over the life expectancy used by the first generation beneficiary, thereby spreading the tax burden from distributions over a long period.
If the person who owns the account dies, the government still wants its cut, even when the account is inherited by someone else.
However, this second-generation beneficiary can spread out the bill by taking distributions over many years or let the account continue to grow tax-deferred, up to certain age limitations. Keep in mind that spouses and non-spouse beneficiaries are treated differently when in comes to IRAs. A spouse who inherits an IRA can either rollover the funds to their own IRA or wait to take Required Minimum Distributions (RMDs) until the late spouse would have been age 70.5.
Non-spouse beneficiaries have three choices, including taking an immediate payout of the full amount of the account and paying the IRS taxes. They can also just take only RMDs based on their life expectancy or that of the deceased; if they are over age 70.5, they must begin taking RMDs within a year of inheriting the IRA. Another option is to empty the account over five years.