Articles The Importance of Beneficiaries

December 29, 2014

Naming a beneficiary is an essential component of responsibly managing your retirement accounts. When opening a retirement account, you're asked to choose primary and secondary beneficiaries. These are the people or entities who will receive your account's assets when you die.

If you have accounts with large balances or at different financial institutions, consulting a financial advisor can help distribute your funds as you intended in a way that limits the taxes paid by your beneficiaries. If you don't establish any beneficiaries before you die, your assets will be given to your estate and could be tied up in court.

When it comes to beneficiaries for Individual Retirement Accounts (IRAs), the exact amount of money distributed depends on whether the beneficiary is a spouse or a non-spouse.

Beneficiary Distribution Options for Traditional* & Roth IRAs

Spouse is Sole Beneficiary

  • IRA distributions must begin by the later of:
    • Dec. 31 of the year following the IRA owner's death
    • Dec. 31 of the year the IRA owner would have turned 70½
  • IRA is paid out in full and must be completely distributed within 5 years of IRA owner's death.
  • Beneficiary accepts IRA funds as their own, and amount is incorporated into the beneficiary's IRA. Beneficiary may convert these funds from a Roth to a Traditional IRA.
  • Distribution is recalculated yearly using the spouse beneficiary's single life expectancy.

Spouse is Not Sole Beneficiary

  • IRA distributions must begin by Dec. 31 of the year following the IRA owner's death.
  • IRA is paid out in full and must be completely distributed within 5 years of IRA owner's death.
  • Spouse and beneficiaries accept funds as their own, and amounts are incorporated into their respective IRAs.
  • Distribution is determined using the single life expectancy of each beneficiary in the year following the IRA owner's death. Future-year distributions use non-recalculation.

Non-Spouse Beneficiary

  • IRA distributions must begin by Dec. 31 of the year following the IRA owner's death.
  • IRA is paid out in full and must be completely distributed within 5 years of IRA owner's death.
  • Beneficiary accepts funds as their own, and amount is incorporated into the beneficiary's IRA.
  • Distribution is determined using the single life expectancy of each beneficiary in the year following the IRA owner's death. Future-year distributions use non-recalculation.

Non-Individual

(Non-qualified Trust, Estates and Entities)
  • IRA is paid out in full and must be completely distributed within 5 years of IRA owner's death.
*These options only apply to Traditional IRAs if a Required Minimum Distribution is not required by IRS regulation.
Beneficiary Distributions for Traditional IRAs On or After the Required Minimum Distribution Payouts Begin

Spouse is Sole Beneficiary

  • IRA paid out in full and distributions must begin by Dec. 31 of the year following the IRA owner's death.
  • Beneficiary accepts IRA funds as their own, and amount is incorporated into the beneficiary's IRA.
  • Distributions are calculated using the longer of:
    • Spouse beneficiary's single life expectancy of oldest beneficiary during the year of death. Future-year distributions use non-recalculation.
    • The IRA owner's single life expectancy, subtracted by one. Future-year distributions are non-recalculated using the IRA owner's life expectancy.

Spouse is Not Sole Beneficiary

  • IRA paid out in full and distributions must begin by Dec. 31 of the year following the IRA owner's death.
  • Spouse and beneficiaries accept funds as their own, and amounts are incorporated into their respective IRAs.
  • Distributions are calculated using the longer of:
    • Spouse beneficiary's single life expectancy of oldest beneficiary during the year of death. Future-year distributions use non-recalculation.
    • The IRA owner's single life expectancy, subtracted by one. Future-year distributions are non-recalculated using the IRA owner's life expectancy.

Non-Spouse Beneficiary

  • Distributions are calculated using the longer of:
    • Beneficiary's single life expectancy of oldest beneficiary during the year of death. Future-year distributions use non-recalculation.
    • The IRA owner's single life expectancy, subtracted by one. Future-year distributions use non-recalculation.

Non-Individual

(Non-qualified Trust, Estates and Entities)
  • IRA paid out in full and distributions must begin by Dec. 31 of the year following the IRA owner's death.
  • Distributions are calculated using the IRA owner's single life expectancy, subtracted by one. Future-year distributions use non-recalculation.

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Investors should carefully consider the investment objectives, risks, and charges and expenses associated with municipal fund securities before investing. This and other information about municipal fund securities is available in the issuer's official statement which can be obtained directly from the issuer, or if distributed through a broker dealer, may be obtained from a financial adviser, and should be read carefully before investing.

An investor should consider, before investing, whether the investor's or designated beneficiary's home state offers any state tax or other benefits that are only available for investments in such state's qualified tuition program.

If a municipal fund security describes one or more of their investment options as having the characteristics of a money market fund, it is important to know that an investment in the security is not insured or guaranteed by the FDIC or any other government agency (unless such guarantee is specifically provided by or on behalf of such issuer) and, if the security is held out as maintaining a stable net asset value, that although the issuer seeks to preserve the value of the investment at $1.00 per share or such other applicable fixed share price, it is possible to lose money by investing in the security.