Your Surprise IRA Beneficiary – By John R. Bullis

Saving for your retirement and possible bequest to family and friends is good to do!

Many folks have an Individual Retirement Account (IRA) that is a major part of their retirement savings.

Your IRA has designated beneficiaries.  Usually you during your lifetime, you will take the distributions from the IRA.  If you are age 70 ½, you must take a minimum distribution each year. Other beneficiaries you designate will inherit the IRA at your death.  Usually the named beneficiaries are your family members, friends or charities you support. However, there is another beneficiary we sometimes forget and that beneficiary is not named on the account.

Distributions from regular IRAs are taxable as ordinary income. Any long term capital gains and qualified dividends earned by the IRA investments lose their special low tax rate status when the money is distributed. Our federal government taxes those IRA distributions with your other income.  That means the federal government is a beneficiary that gets part of the value distributed-your surprise beneficiary.

If your income is taxed at 15% and your annual distribution is $10,000, then your surprise beneficiary (federal government) will get about $1,500 tax. If you receive Social Security benefits, the annual distribution may increase the taxable amount from the Social Security benefits and your surprise beneficiary will get about 15% of the increased taxable amount.

If the last bit of your income is taxed at a higher rate, your surprise beneficiary gets even more!

If you live in a state that has a state income tax (i.e. California, Oregon, Arizona) there is yet another surprise beneficiary-that state.

Depending on your other taxable income, when you receive a distribution from the IRA, plan on having part of it going to your surprise beneficiary. That’s why some folks have the custodian of the IRA withhold something for income tax and they just get the net check.

Some folks have decided to pay tax early by converting part or all of the IRA to a ROTH IRA.  They will be taxed on the value that is converted.  But when it passes to others at your death at least they will not have to share the IRA with the surprise beneficiary.

Did you hear, “There comes a moment when you have to stop revving up the car and shove it into gear.”   David J. Mahoney – philanthropist