Tips to Review Your IRA for Beneficiaries and Distribution

Your IRA might need CPR. That’s a “Complete Planning Review” to get the most from your IRA. Here are often misunderstood, but rock-solid rules about your traditional IRA that too many families overlook and they suffer as a result.

  1. Somehow, Someday, Someone will pay taxes on your IRA. That will be you when you withdraw it during your lifetime. Otherwise your beneficiaries will pay taxes when they receive the money from the IRA. (The only exception is if you you have very little other income, and you take a small distribution.)
  2. Your Will does NOT control your IRA. The IRA will pass according to the beneficiary designation you signed with the IRA provider.
  3. IRAs are always in one person’s name; they are never held jointly. That means that if the owner becomes incapacitated, the ONLY way to access the IRA is through a “powerful” power of attorney (that I’ve mentioned before) or a court appointed guardianship.
  4. You must take Required Minimum Distributions called “RMD” after you reach a certain age (age 70-1/2) but you can always take out more…and sometimes you should!

Now that you know these rules, would this be a good time to do CPR on your IRA? Here are a couple of key steps to think about.

Should your spouse be your beneficiary….or a trust?

For traditional estate planning, often it’s best to name your surviving spouse as the primary beneficiary under the IRA. That’s because special spousal IRA rules allow surviving spouse (if younger) to take smaller mandatory distributions, and to treat the IRA as their own. That means the surviving spouse can name the children as beneficiaries and further extend the time for distribution when the surviving spouse dies.

But for elder care planning, sometimes it is better to use a trust to receive the IRA “for the benefit of the surviving spouse,” instead of naming the spouse outright. That can keep the IRA from being a countable Medicaid asset, protecting assets for the surviving spouse if he or she ever needs nursing home care.

Would it be smart to pull more money from your IRA?

Most people take as little as possible from their IRA, just the lowest required distribution. But if you’re paying for home care you might be smart to pull money out of your IRA first, before depleting your other investments. And if you or your spouse is in a nursing home, that IRA could cost you thousands and thousands of extra nursing home bills, since it’s a countable asset for Medicaid.

Should you pull more money from your IRA? It depends on a lot of factors, but the answer might be “yes.” After all, if you aren’t paying any income taxes right now, you may be able to withdraw money from your IRA without any additional tax liability. You will have found the loophole for IRA taxation.

Now’s a great time to review your IRA, especially if you or your spouse worry about long-term care costs. Be sure to get expert help, because the IRA rules are very complicated.