Tag Archives: trust

Beneficiaries: Assigning your money to infinity from beyond

What Is a Beneficiary and How Do I Choose One? | DaveRamsey.com

In my few years in my banking career I have seen many things but one thing that breaks my heart it is seeing someone without a beneficiary for their funds. This simple step can lead you to avoiding months if not years of hassle with the courts (or even court costs if necessary). It is relatively simple process that I preach on constantly whenever I see it, so get ready for me to get back on my soap box once again.

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During this trying time, bank accounts, insurance accounts, brokerage accounts, retirement accounts, you name it. The sheer number of financial institutions that count us as customers may seem staggering and in the rush to open an account, we may have forgotten to add a beneficiary, or even simply postponed that last little detail until it was more convenient (or maybe someone hasn’t thought of one yet). Simply taking the time to ask about it, either you or the agent, will help move the conversation in the right direction for several reasons.

The first reason is that you want to make sure you want the people of your choosing to inherit your money. The person you can list can be a spouse, a child, a relative you trust, or even your trust (we’ll come back to that later don’t you worry). By naming your beneficiaries, you ensure that your money goes where you intend for it to go. That could be to a relative who really needs the financial assistance, a charity that’s close to your heart or whomever you want the money directed to. Without clear directions as to your wishes, executors or the state will follow only what the law says in distributing your assets and that’s not fun. You can name as many beneficiaries as necessary to split the proceeds as well if you would like as well. But do keep in mind if a beneficiary passes or any circumstance arise to compromise the beneficiary that these can be changed in most cases. This way everyone can speed up the probate process (because probate court is not a fun time for your family or the financial institutions reporting process) in addition there’s less going to a court appointed estate to be taken care of.

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The second reason is being able to update it on an annual basis. If you’re married, you can almost always change the beneficiary of your accounts without your spouse’s permission. In fact, this is one of the first recommendations I make in a divorce process. The worst that can happen is being forced to put the beneficiary designation back to the previous spouse if ordered by the court or other arrangements. You can change a beneficiary so make sure to periodically check to see if you have a beneficiary listed or if you need to change or add one (my recommendation is once a year or every six months if needed.) This will help for several reasons: 1) it keeps your information up to date 2) you can also use this way to limit family fighting over your assets once you’re gone. 3) Beneficiaries trump wills as well, so make sure you plan accordingly. (contact your estate planer regarding this to make sure things are done appropriately.

 Naming a beneficiary is an easy thing to skip over when opening an account, but this small step can save a huge headache – and potentially a lot of money – later. So take an inventory of your financial accounts today, and ensure that your wishes are up to date. Then resolve to keep the accounts updated annually so that you continue to avoid problems for yourself and your heirs. During this time, I urge you now, more than ever. Please get your beneficiaries in order if you haven’t considered it before because we are all human and a simple two-minute process can help save your loved ones from a longer time trying to take care of your estate. Until the next time friends. Stay safe and healthy, Excelsior!

IRA Distributions

In my previous entry I discussed contributing to the different types of IRAs. Once you hit the appropriate age you will need to make a distribution from your IRA. You might need to withdraw earlier but it all depends on your situation. There are many factors involved with IRA distributions so let us dive in shall we?

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IRA owners generally must include traditional IRA distributions in their taxable gross income. There are, however, some exceptions to the rule: rollovers (if done properly), transfers, recharacterization, removal of excess contributions, revocation of regular/spousal/catch up contributions, distribution of basis (nondeductible traditional IRA contributions and after-tax rollover contributions). Taxable traditional IRA distributions taken before age 59 ½ are generally subject to an additional 10 percent early distribution tax, this is to encourage you not to take an early distribution if you can help it. This early distribution tax is paid when the persona taking out the early distribution files their federal tax return. The penalty tax does not apply, however in special circumstances such as age 59 1/1, death, disability, certain medical expenses, IRS levy, and qualified reservist distributions.  There are also waivers for the penalty tax in instances of taking qualified hurricane distributions provided by the disaster tax relief and other provisions provided during qualified natural disasters.

A Roth IRA qualified distribution may be taken tax and penalty free as long as: there is a 5-year waiting period, the owner is 59 ½, death, disability, or is a first-time home buyer. If these criteria aren’t met it is a non-qualified distribution. Roth IRAs are distributed in the following order: annual contributions, conversion and retirement plan rollover assets (by year), and earnings. These can also get the same penalty tax waivers as a traditional IRA. Both types of IRAs are subject to federal tax withholding up to 10 percent of the distribution unless the IRA owner elects the IRA owner elects not to have income tax withheld or have more than 10 percent of income tax withheld.

Traditional IRAs are subject to required minimum distributions (RMD) that means when you turn 70 ½ you must take a certain amount of funds from your IRA. Typically, these must be taken out by April 1st of the following year they become 70 ½ this the required beginning date (RBD), all required RMDs must be taken out by December 31st. You can also donate $100,000 of your IRA funds tax free to charity if you’re age 70 1/2 , these go directly to charity and are reported to the IRA owner to claim on their taxes. An RMD is calculated by the balance of the IRA and the distribution period. The distribution period is calculated by a number using the IRS life expectancy table. If you fail to take your RMD you will be subject to an excess accumulation tax equal to 50% of the amount that was needed to be taken out. for the sake of simplicity i’ve included a copy of the life expectancy table here.

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When an IRA owner dies their beneficiaries are entitled to the remaining balance of the IRA. IF there are no beneficiaries, the owner’s estate Is generally entitled to the funds but in some cases the funds will just defer to the living spouse based on documentation. The IRA plan will specify how assets will be paid out when a beneficiary is names. Beneficiaries should also provide copies of the owner’s death certificate to the financial organization where the IRA is housed. Once obtain. need and all beneficiaries have been verified, funds can be distributed amongst the beneficiaries. If there is more than one beneficiary, the funds will be split reasonably between all beneficiaries. Depending on when the owner dies, distribution of funds for beneficiaries can get tricky in such events like the owner dying before the required beginning date. The IRS has developed a table for traditional IRA beneficiary options including default life expectancy payments if a beneficiary isn’t named by December 31st of that year. I have made this available for your viewing pleasure here

The beneficiary may take out distributions of any amount as long as the entire amount is withdrawn December 31st of the year containing the owners 5th anniversary of their death. Beneficiaries can also have life expectancy payments payed out starting December 31st of the year following the year of the IRA owner’s death based on the life expectancy of the beneficiary. As a beneficiary you can also move your deceased spouse’s IRA into your own through a direct transfer and distribute at any time or roll it over into their IRA, minus their RMD due for that year. You can also have a non-person beneficiary such as an estate or a trust if it is qualified and valid with identifiable beneficiaries listed. The same rules apply for Roth IRAs as well.

We’re reaching the end of my series on IRAs. I hope that the journey so far has been enjoyable. I also hope that I made these fun retirement assets as easy to understand and that you might even be considering getting yourself an IRA if you don’t already have one. Tune in next time for my next entry my friends. Invest wisely, ciao!

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