One of the most important aspects of your overall financial planning is often the most unpleasant and uncomfortable – figuring out what should happen to your assets after you die. Having a will is a good start, but there are other techniques you can use to make sure you’ll be able to reach your estate planning goals.
As with nearly any other type of asset, you can specify particular beneficiaries for your self-directed IRA, or you can simply have your account balance treated as part of your overall state, subject to the terms and conditions of your will. But since there are some special advantages to using an IRA to do your estate planning, you may want to make use of them.
Advantages of a Roth IRA. Remember that a self-directed IRA can be structured either as a traditional IRA or a Roth IRA. A traditional IRA has rules on required minimum distributions, the effect of which means that you need to take a certain amount of money out of your account each year after you reach age 70½. If you have a number of different retirement accounts, or other assets you could draw upon while you’re in retirement, these rules reduce your ability to have your estate (or at least the portion of which that’s in your self-directed IRA) to continue to grow on a tax-free basis. A Roth IRA is not subject to these rules.
Other Required Minimum Distribution Issues. If your self-directed IRA passes to your spouse, then the required minimum distribution rules that apply to traditional accounts will be based upon your spouse’s age. This means that if your spouse is younger than age 70½ when they inherited your account balance, they won’t need to take any required minimum distributions. This is true even if you were subject to those rules at the time he passed away.
Alternatively, as an additional estate planning tool for your spouse (if possible, it’s almost always a good idea for married couples to conduct their estate planning jointly, in order to make full use of all the tools that are available), to disclaim any rights to the IRA. This means the account would pass to the account holder’s next heir. If the original account owner passed away before April 1 of the year in which he or she would have turned age 70½, the heir must take the entire account balance over the course of a five year period. Depending on the assets in the account, and the nature of those assets, there may be advantages to making this choice.
Keep Interested Parties Well Informed. It’s always a good idea to make sure that whoever you anticipate will administer your estate understands how a self-directed IRA is different from other estate planning tools. Despite the efforts of self-directed IRA custodians such as Quest Trust Company, there is still a degree of misunderstanding about what types of investments may be held within an account, and how those account assets are treated. You want to make sure that your intended beneficiaries receive the full benefit of your savings and investment efforts.
Finally, you also want to keep abreast of the ongoing changes to the tax code as it impacts IRAs. You may need to adjust your estate planning over time to account for these changes and still suit your goals.