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By Christine Benz | 12-10-2014 09:00 AM

A Tricky Choice: Who Gets Your IRA?

IRA expert Ed Slott discusses the pros and cons of leaving an IRA to a spouse, children or grandchildren, a trust, or a charity.

Christine Benz: Hi, I'm Christine Benz for Who you name as a beneficiary for your IRA is an important and surprisingly complicated decision. Joining me to discuss this topic is Ed Slott; he's an IRA expert and a best-selling author. Ed, thank you so much for being here.

Ed Slott: Great to be here. Thanks.

Benz: Let's start with this important topic of IRA owners who want to name beneficiaries for their accounts. I'd like to see if you can offer some tips for them. Let's start with one of the most common situations: a married person, his or her natural inclination would be to name the spouse as a beneficiary. When is this appropriate, generally speaking?

Slott: In most cases. That's what most people want to do. They name their spouse on everything. So, you're right; that's what most people do.

Benz: So, are there [instances] when you would not do this, when this wouldn't be a good idea?

Slott: Sure. When you don't want to leave the money to your spouse. It might sound funny, but let's say it's a second marriage. You've already provided maybe some other income to that spouse, and you want your children from your first marriage to get your IRA so they can stretch it. So, there are situations. It's not all about taxes. The first thing you want to ask is, "Who do I want my IRA to go to?" Then, we work from there. But you're right--most times, it's the spouse. But also, you might have a spouse who's incapacitated or can't handle money, and you could still leave it to that spouse, say, through a trust.

Benz: We'll talk about trusts in a minute. But first, I wanted to get your sense of what the benefits are for spouses who inherit IRAs. What are the key advantages from a tax standpoint as well as inheriting those assets?

Slott: Well, I always say the spouse, according to the tax rules, is like the queen in a chess match; she or he can pretty much do anything and has advantages that other nonspouse beneficiaries don't have. The biggest one is the ability to do a spousal rollover, where, let's say, the husband dies and the wife can just roll it over to her own IRA or retitle it as her own IRA. That's a big advantage because, let's say, the spouse [who is inheriting the IRA is] only 65 years old. She doesn't have to start taking distributions until she would have turned 70 1/2.

A spouse also has the ability to remain as a beneficiary; she can go both ways--either do a spousal rollover, treating it as her own, or if she wants to, she can remain a beneficiary. The benefit there is, if the spouse is what the tax law refers to as a younger spouse--young, for tax law, is under 59 1/2. If you are under 59 1/2 and you inherit as a spouse, you are better off staying a beneficiary. The reason is, if you need some of that money, you can take it out penalty-free. Still pay the tax, but it's penalty-free, even though you are under 59 1/2. Then, once you are 59 1/2, a spouse has the additional ability to go back now and do a spousal rollover. There is no deadline for a spousal rollover. So, a spouse has huge advantages when it comes to inheriting IRAs.

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