An IRA retirement fund can be used to help support your spouse and children once you've passed. However, you and your beneficiaries must follow some basic rules to be sure your IRA will be transferred to them and will be handled properly. There are some steps you should take now to ensure that your IRA will do what you want it to do for your loved ones.
1) Check your IRA beneficiary paperwork.
IRAs cannot be passed down like an heirloom vase or a bank account. You can't spell out to whom to pass the IRA merely by a declaration in your will.
When you first opened your IRA, you had to name a beneficiary. Check now to be sure who that beneficiary is. There are different rules for your spouse and for any non-spouse beneficiaries when it comes to how they must treat your IRA. So be sure you know exactly whom you've named to receive your account funds.
Consider setting up a trust as the beneficiary. In a recent court case, Clark v. Rameker, an IRA bequeathed to a woman by her mother was determined not to be protected from creditors when the woman later filed for bankruptcy. In this case, the IRA was not considered "retirement income."
Setting up a trust as beneficiary may be the best way to protect your IRA from future creditors.
2) Have a discussion with your spouse about your IRA.
If you name your spouse as the beneficiary of your IRA, your spouse may continue the IRA in his or her name or may rollover the account into his or her own account. While non-spousal beneficiaries must begin withdrawing money by December 31st of the year in which the original IRA owner dies, spouses who rollover the IRA don't have to withdraw the funds until the late spouse would have reached age 70 and 1/2.
The former rules apply to the new IRA: if your spouse takes any money out of their IRA before age 59 and 1/2 there may be a 10% penalty. But your spouse can also convert your IRA to a Roth IRA when rolling it over, which can provide more value to the account.
Given the Supreme Court decision regarding the status of IRAs when it comes to protecting them from creditors, it may be wise for your spouse to do a rollover. The two of you should discuss the options and go over various scenarios so that after you pass, your spouse will feel more confident in making decisions concerning your IRA.
3) Speak to non-spousal beneficiaries about their responsibilities.
If your children will receive the balance of your IRA, you should go over some of the requirements they will have to meet to get the maximum value out of your retirement fund. For example, they must withdraw a certain percentage of the balance of the fund every year.
Thy must also rename the fund, indicating it is an inherited IRA.
The IRS provides tables to determine the amount, but there are legal ways to stretch out the withdrawals. Since the withdrawal amounts are determined by life expectancy, you can sometimes name several beneficiaries - a child and a grandchild, for example - so that withdrawals can be made over a longer span of time.
Like any account, an IRA is subject to many different rules when inherited. The Supreme Court has added another twist to the plot. It's best to take a fourth step knowing the complications that can arise. That step would be consulting a professional estate planning attorney. They know the laws and the IRS rules, and they can help you have those delicate conversations with your family by arming you with the knowledge you need to make sound investment decisions.