Q and IRA: Ready Yourself for Common Questions

How you can help shape a client’s retirement income strategy

By Charles D. Osmond, J.D., CLU, ChFC

Affluent Markets Consultant, W&S Financial Group Distributors

Should an individual retirement account (IRA) owner always be sure to name a beneficiary? What may happen at their death if they have not? Is naming an IRA owner’s estate as beneficiary a good idea? What about clients who are unsure how any remaining IRA assets should be distributed at their death?

Is it really necessary for an IRA owner to take required minimum distributions (RMDs) after they turn age 70½? What if a client doesn’t need their IRA distributions to live on and is upset at the idea of paying income tax on unwanted annual distributions they are forced to take?

Given that more than 14 million IRAs now exist,1 it makes sense for financial professionals to be prepared to discuss concerns such as these. In helping clients shape and execute a retirement income strategy, be ready to review IRA drawdown options, as well as designation and distribution options for beneficiaries. Let’s briefly consider some general rules about these fairly common situations.

Should an IRA owner always name a beneficiary?
Generally, yes. It is often a best practice to suggest that IRA owners designate an individual as their IRA beneficiary. In a harmonious marital and family situation, naming the owner’s spouse as the sole primary IRA beneficiary generally offers the widest selection of planning options to a surviving spouse. Spouses can re-title the IRA as their own contract, name their own beneficiary or beneficiaries and take required minimum distributions (RMDs) based on the surviving spouse’s date of birth. Alternatively, a surviving spouse who has been designated as the sole primary beneficiary can select from several available beneficiary IRA distribution options.

When children are named as successor IRA beneficiaries, a surviving spouse named as the sole primary IRA beneficiary can choose to disclaim some of or the entire IRA asset, allowing any disclaimed portion to be distributed directly to the children. If a spouse dies before the IRA owner, any children named as successor beneficiaries are entitled to receive their individual portion as a lump-sum, defer payment of their portion for five years or have their portion distributed – and taxed – in installments over a period as long as their lifetime.

In helping clients shape and execute a retirement income strategy, be ready to review IRA drawdown options, as well as designation and distribution options for beneficiaries

Is it a good idea to name an IRA owner’s estate as beneficiary?
Generally, no. This would require the entire IRA balance to be distributed and taxed not later than December 31 of the year in which the fifth anniversary of the IRA owner’s death occurs. It also will result in the IRA being treated as a probate asset. This may cause delay and additional expense in distributing funds from the IRA. The IRA will be distributed according to the terms of the will, or under relevant state law rules if the IRA owner dies without a valid will. Life expectancy-based IRA death benefit distributions are not available when an estate is named as beneficiary.

What about situations when death occurs and no IRA beneficiary has been named?
“Go ahead, leave the IRA beneficiary designation blank. Add the name later, after you have decided who you want to receive any balance of your IRA at your death.” Is it a sound planning practice to make a statement such as this to an uncertain client? No — most if not virtually all contract language directs the IRA trustee or custodian to distribute IRA funds to the estate of the owner in a situation of this nature. This will trigger the results outlined above — generally an unintended consequence that can accelerate taxation and defeat distribution planning opportunities that could have been far more desirable for some or all beneficiaries.

Is it really necessary that an IRA owner take RMDs after turning age 70½?
Yes, unless they are willing to pay a 50% penalty tax, plus any additional nonpayment of tax penalties and related late payment interest, on any required minimum distribution amounts that were not taken when they should have been. The IRS is quite serious about enforcing its rule: required minimum distribution amounts are, in fact,required.

Note that The American Taxpayer Relief Act of 2012 extends the Qualified Charitable Distribution (QCD) through 2013. A QCD is an otherwise taxable distribution of up to $100,000 from an IRA owned by a taxpayer age 70½ or older that is made directly from the IRA to a qualified charity. A QCD can be used to satisfy any RMDs for the year.

Consultative Service Builds Relationships
Can building awareness of important IRA opportunities and rules result in increased loyalty and new opportunities to discuss asset accumulation and distribution products? Share some ideas and let clients decide.


1 Source: Employee Benefit Research Institute, May 2011.