On January 1, 2002, new IRA distributions rules went into effect. The good part is that the rules allow you to take smaller mandatory distributions (and pay less tax during your lifetime) and also to spread your IRA over 2 two more generations. But the new law also places the burden of taking the right actions on your heirs, which may be an unsettling thought. (You may be similar to retirees who have told me that they do not find their heirs’ financial judgment to be exemplary, to put it nicely).
As to your own distributions, most everyone is forced to use the same IRS tables, so your bank or securities firm will hopefully calculate this for you. That part is easy. The other issue is to change your beneficiaries. The new law allows the beneficiaries of your plan until December 31 of the year after your death to decide on the distribution among those beneficiaries you have named.
Let’s take an example. Say you name your three sons as equal beneficiaries. One is very financially successful and does not need any inheritance. The second has a good heart, is raising three foster children, and does not have much income. The third son passes away due to illness. In light of this hypothetical scenario, would you still want to divide the IRA equally? Maybe now, you would have wanted to give 2/3 of the funds to the son with foster children and the other 1/3 to the surviving grandchildren of the deceased father. But this cannot be done because you did not name your grandchildren as potential beneficiaries! If you had, your IRA could have been divided based on need. So please add all possible beneficiaries to your beneficiary designation form if you would like the funds to be distributed based on beneficiary situations at the time of distributions.
What happens when you leave your IRA to heirs? There are a number of ways they can really mess it up. For example:
They need to know that they should not take the money out all at once (they will need to pay taxes on all of it). Rather, they are entitled to spread out the distributions over their lifetime and pay a little tax each year.
They need to know that your IRA should be divided up into a separate IRAs for each beneficiary before distributions start. Failure to do so will force all beneficiaries to withdraw their portion as quickly as the beneficiary who by law must withdraw his or her portion the fastest. For example, if you had a 60 year-old son and a 45 year-old son, the 45 year-old would be forced to take out his money as fast as his older brother, even though his life expectancy is longer than his brother’s The rule is: Every beneficiary gets to use their own distribution schedule if they get separate IRAs.
They need to know that if estate tax was paid on your IRA, they can take a credit against the income taxes they must pay.
To get a more detailed description of steps you should take and printed instructions for your beneficiaries to keep return the enclosed coupon for a guide to IRA owners and beneficiaries.