A lot can happen in your personal life in a year ... you could gain a child or a grandchild ... you could lose a sibling or best friend ... you could separate from your spouse, or you could get married. And maybe you've also moved or started a new job. Any of these types of changes could affect your IRA. Year-end is a good time to take stock of all that's happened over the last year, update your IRA beneficiary designation and account information if needed, and consider the impact these changes may have on your IRA.
Beneficiary designations are important.
Naming a beneficiary for your IRA assets is important. By naming an IRA beneficiary, you ensure that legal rights to your IRA assets are transferred directly to the person (or entity) of your choice upon your death without going through probate. You may name more than one beneficiary to receive a portion of your IRA, your IRA will be paid to your estate.
If you're married and you live in a state that has community or marital property laws, you may be required to name your spouse as a beneficiary unless your spouse agrees to the naming of another beneficiary designation to reflect your current wishes for passing on your IRA assets.
Beneficiary payment options changed this year.
The SECURE Act changed several rules related to retirement savings, including the rules beneficiaries must follow when they inherit IRA assets after the IRA owner's death. These changes are effective for beneficiaries who inherit in 2020 and later years. A spouse beneficiary has the most payment options compared to non-spouse beneficiaries. For example, spouse beneficiaries can still treat the inherited IRA as their own IRA or treat the IRA as an inherited IRA and take annual payments over their lifetime. Both options can help spread out the tax liability of the inheritance. But most other beneficiaries, including adult children, now must take all assets out of the inherited IRA within 10 years of the IRA owner's death. (There is an exception for minor children, chronically ill and disabled individuals and beneficiaries who are not more than 10 years younger than the IRA owner.) Estates and certain trusts may only have five years to deplete the inherited IRA.
The new rules could affect who you want to name as the beneficiary of your iRA. For example, if you have a large IRA balance, an estate plan with a strategy for the tax impact of IRA assets for your beneficiaries, or alternative investments in your IRA, you may want to consult with your legal or tax advisor about your beneficiary designations, especially if you name someone other than a spouse as the beneficiary.
Splitting IRA assets due to divorce?
When spouses divorce, all or portions of an IRA owned by one spouse may be awarded to the other spouse as part of the property settlement. To ensure there are no tax consequences for splitting the IRA assets, the portion of the existing IRA being awarded to the ex-spouse must be directly transferred to an IRA set up by that ex-spouse. The divorce decree or court order must address the award of one spouse's interest in an existing IRA to the other spouse. It should also specify the dollar amount or percentage being awarded, any timing requirements, and whether the investment is to be liquidated before transfer. If you withdraw money from your IRA, even if it is used to satisfy a court-ordered settlement or child support mandate, the withdrawal will be taxable to you as the IRA owner following the general tax rules for IRAs.
Tax-free withdrawal allowed for childbirth or adoption.
Beginning in 2020, IRA owners may take up to $5,000 from their IRA as a "qualified childbirth or adoption distribution." Each parent may take up to $5,000 for each child born or adopted for a total of $10,000 per child. (An eligible adoptee must be younger than 18 or have special needs and cannot be a spouse's child.) Distributions must be taken within one year of the birth date or the date the adoption is final. You must include the amount withdrawn from the IRA in your taxable income for the year (to the extent the distribution would otherwise be taxable), but the 10% early distribution penalty tax is waived. You may also repay these distributions to an IRA at any time in the future.
Update address and contact information.
If you have moved or changed jobs this year, or have a new email address or cell phone number, please update your contact information with Mainstar Trust. We want to make sure you receive your account statements and other important information about your self-directed IRA.