Five People You Can List as Beneficiaries on Your IRA

One of the first and most important pieces of information you will fill out on your IRA paperwork is naming a beneficiary in the event you pass away before the funds have been completely distributed. Since your IRA is not directly linked to your Will, your inheritors need to be clearly defined in both documents, even if you plan on using the same divisional scheme. Not naming a beneficiary for your IRA can lead to disastrous consequences. So, who can you name as a beneficiary? Everyone has different family bonds or none at all, so it’s important to choose an inheritor or inheritors that best fit your needs and wishes. Below are the five types of beneficiaries you can name on your IRA.

  1. If you are married you will probably want to list your spouse as your primary beneficiary, as they can roll the funds into their own IRA account, use the funds to cover funeral costs and debts or use the funds to cover the cost of living without your income. If they roll the funds over into their own IRA, the distributions will be based on their own life expectancy, not yours. They can also name their own beneficiaries at this point for when the time comes to transfer the funds down the line.

If your family is blended and you don’t completely trust that your spouse will exert fairness to your children with the funds after you pass, you can divide your account however you wish between however many parties you wish to ensure everyone receives their fair allotment. If you were ever divorced and don’t want your ex to benefit from your account after your passing, be sure to update your forms to your current spouse, children, or somebody else. After you die, the forms can’t be changed and your ex will legally be entitled to the money.

  1. Children, grandchildren, other. If your spouse passed before you, or you’re currently unmarried, the most popular second option is to pass the funds to children, grandchildren, or another family member or friend. Keep in mind, the inheritor can choose what they will do with the money once it’s in their name. They can open their own inherited IRA to grow the funds tax-deferred until they reach retirement age, or they can just cash out immediately and not take complete advantage of the fund growth.
  2. If you don’t trust an inheritor to make wise decisions with their inheritance, either because of age or personality, you can name a trust as a beneficiary to maintain a bit more control over the funds after you pass. The distributions from your IRA go directly into the trust, and the inheritors you have listed in the trust will only gain access to the money when you want them to. Your written instructions will dictate who gets money, how much they get, and when they get it. Distributions from your IRA will then be calculated by the life expectancy of the oldest person listed in the trust. While this option provides the most amount of control, it also gives less growth potential and may cost more in taxes and fees than an inherited IRA.
  3. If you don’t name a beneficiary, or don’t have any living relatives to name, the money in the account will default to your estate, which may be used to pay off debts first before distributing the leftover money to heirs. Since the funds would be distributed immediately to the estate, the total will be subject to income tax and possibly estate tax as well if your assets are worth more than $5,490,000 (2017). This option also disallows for maximum growth potential, so it can be the least advantageous choice unless the account holder has no other options.
  4. If you have a traditional IRA with tax deferred funds, you may consider giving all or part of your account to a charity. Charities can accept funds without paying income tax, and your family may deduct the donation from your total estate to avoid paying estate tax. If you have a large estate and several accounts to divide between family members, you may consider the counsel of a specialized attorney to ensure you’ve covered all your bases.

Before you choose your beneficiaries, be sure to talk to your financial advisor about the best possible options for you. They will also help you set up contingency plans in case situations change. When it comes to leaving money to your relatives, you can never be too careful.

The Three Situations Where You Might Consider an Early Withdrawal From Your Self-Directed IRA

It’s important to understand that the default IRS regulations regarding early withdrawals from an IRA. In general, taking a distribution from your account before age 59½ will subject you to a 10% penalty on the amount of the distribution, plus whatever taxes may be due.

In each of the situations below, there are specific requirements that need to be met in order to avoid having to pay the 10% penalty, but in all cases you still may owe taxes on the amount of the distribution. Pay close attention to all the requirements. If you make a mistake in the distribution process it could prove to be quite costly.

  1. To Purchase a First Home. The IRS regulations allow you to take a distribution of up to $10,000 to pay for a down payment on your home if you are a first-time homebuyer (which is defined to mean that you haven’t owned your own home in the past two years). You can also use this penalty free provision to assist a child or grandchild with their down payment, if having access to these additional funds would make the difference between getting a home and not – but it may be worth forgoing future growth of those funds
  2. For Certain Uninsured Medical Expenses. There are actually two situations in which you can use your self-directed IRA in order to pay for some of your medical expenses. The first is in situations where you need to pay for certain unreimbursed medical expenses. The second situation is to pay for medical insurance premiums for you and your family when you are unemployed. one reason taking this type of early withdrawal can be so important is that it eliminates any temptation that might otherwise exist for you to underinsured or yourself or otherwise not seek necessary medical care.
  3. Higher Education Expenses. The third exception we’ll discuss is taking an early withdrawal in order to pay qualified educational expenses. Generally this means paying tuition or room and board for your child, but you can also make such a withdrawal for your own educational expenses, those of your spouse, or those of a grandchild.

There are no limits for how much you can take out of your account early for these purposes. However, given that an early distribution means that you’re losing out on the long-term growth potential of those funds, you may wish to explore other funding options first, including student loans (which in some cases can involve interest and that’s tax-deductible).

In fact, in each of these three situations, it’s always important to consider other alternatives prior to taking an early distribution from your self-directed IRA. Just because you’re authorized to do so doesn’t mean there isn’t a better way.

In addition to losing out on future investment growth, there are other ways in which taking an early distribution can be a bad financial decision. For example if you need to liquidate certain investments early, then the effective loss you experience by taking the early distribution is effectively much greater than the amount of the distribution.

The Biggest Secret to Retirement Saving Success With a Self-Directed IRA

There are certainly a lot of different retirement strategies out there. Regardless of your age, income level, or current level of savings, you’re likely to have access to multiple strategies to try to help you reach your goals.

And there’s no shortage of investment advice on what types of investments are best for you. Just pick up a copy of virtually any personal finance magazine and you’ll read about a wide range of options, some of which may even appear to be in direct conflict with one another.

But perhaps the biggest factor that will contribute to you reaching your retirement goals is common across all of these options. And it remains something of a secret even though it’s so easy to do. The secret?

Be consistent with your retirement savings.

By that we mean that if you save as much as you can each year, and you do so year in and year out, then you stand a very good chance of reaching your goals. When you are more consistent with your retirement savings, your choice of investments becomes less important. You won’t have to chase high yielding investments in an effort to boost the value of your nest egg because your account balance will grow over time merely by choosing investments

When you invest consistently, then over long periods of time your investment choices become less of a factor in determining how much you’ll accumulate. This isn’t to say that you should disregard the process of trying to choose your investments wisely, and select assets that meet your risk tolerance and other financial circumstances. Rather, it simply means that your research and analysis of your various investment possibilities shouldn’t overshadow the priority to put money aside in the first place.

In other words, your primary goal should be to contribute the maximum amount to your self-directed IRA every year, and your efforts should be focused on that first and foremost. After you’ve done the work to save as much as the IRS allows, then you can put the time and effort into figuring out how best to put that money to work.

You’ve probably seen the examples before. Looking at several different case studies of hypothetical investors — one who invests each year at the market low, one who invests at the beginning of the year, and one who is unlucky enough to invest at the top of the market — the results are surprising.

Over a period of several decades, the individual who is unfortunate enough to make their investments at the market peak each year has a smaller nest egg than the other two investors, but not by as great of a margin as you might think. And, more importantly, that bad market timer still has accumulated significantly more than an individual who didn’t save as much, or who simply contributed the same amounts to a bank account or other cash equivalent savings vehicle.

 

Have You Made a Plan for Taking Distributions From Your Retirement Accounts?

When most of us think about retirement planning, we tend to focus on the saving and wealth accumulation aspects of the process. That is, we plan how much we think we need to have accumulated by the time we reach our desired retirement age, in order to be able to lead the retirement lifestyle we want.

But a truly effective retirement plan also gives a significant amount of attention to what happens after you’ve built your nest egg and reached your target retirement age. You also need to plan how you’re going to take distributions from your retirement accounts during retirement.

Why Having a Plan is Important.

In short, having a plan for withdrawing money from your retirement accounts is important because you don’t want to outlive your retirement savings. Since it’s impossible for anyone to know when they’re going to pass, it’s important to have a plan, and to build some cushion into the timing of how long you’re going to need to fund your retirement.

Furthermore, this cushion can be vitally important if some of the assumptions you’re making now about your retirement don’t hold true. For example, you might not be able to work as long as you think. Or you might not have accumulated as much as you would have liked, either due to sub-maximal contributions or poor investment returns.

In any case, you’re not likely to be able to reach your retirement goals without giving careful consideration to all the factors relating to that retirement, and coming up with a plan for how and when you intend to take money out of your account.

Are You Subject to the Rules on Required Minimum Distributions?

If your self-directed IRA is set up as a traditional account, then you’ll be subject to the IRS rules on required minimum distributions. These rules state that once you reach age 72, you must begin taking minimum distributions for your account every year for the rest of your life.

Having to make withdrawals from your account every year can require some degree of advance planning, particularly if you’ve used your account to invest in assets such as real estate or private equity, as these assets often require a significant lead time to be able to liquidate.

Roth self-directed IRAs are not subject to the rules on required minimum distributions.

Don’t Forget About Social Security.

Even if you haven’t been relying on your Social Security benefits when doing your retirement planning, there are still ways that the government retirement benefits program can impact your decision making. For example, you may choose to delay taking your Social Security benefits until you’re past your full retirement age, in order to increase the monthly check you receive from the government. Doing so may require you to withdraw a greater amount from your self-directed IRA until you start receiving benefits, but the long-term payout could make for a more comfortable retirement.