What to know when naming your beneficiaries

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Christiana Kelley
5 years ago
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What to know when naming your beneficiaries time retirement planning with Wells Fargo Advisors retirement plans not only provide a tax efficient means to save for That s why it s important to

1 What to know when naming your beneficiaries time retirement planning with Wells Fargo Advisors retirement plans not only provide a tax efficient means to save for That s why it s important to understand how your beneficiary designations can affect the way in which your savings will be inherited. Knowing how the beneficiary designation rules work ensures your wishes about who inherits your assets will be fulfilled. Because beneficiary designations on retirement accounts consider your designations as part of your overall estate planning process. When determining a financial strategy for your this information to help with your beneficiary planning. RMDs for IRA owners While retirement accounts are designed to help build savings over money in retirement or passing it along to your heirs. While your beneficiary designation generally does not impact the RMD rules. IRA Owner RMD Formula* Prior Year-End Value Uniform or Joint Table Divisor Table is used instead. This results in a longer life expectancy and smaller RMDs. The RMD due in any given year is calculated by dividing the previous year s December 31 IRA values by the applicable Uniform or Joint Table divisor. your tax advisor to verify the values that should be used in your calculation. of the prior year. The Uniform Table Divisor is based on the age the IRA owner will attain by December 31 of the current year. The Joint Table Divisor is based on the ages that the IRA owner and spouse beneficiary will attain by December 31 of the current year. The Joint Table can be found in IRS Publication 590. = Required Minimum Distribution Contact your Financial Advisor for assistance former employers. The RBD is April 1 of the year following the year you turn 70½. Most IRA owners and plan participants use the their RMDs. Joint

2 Uniform Table* Attained age in year of Applicable divisor Attained age in year of Applicable divisor *IRS Publication 590 Uniform Table Example: Bob will be 75 in November of this year. Joint Table Example: Sue will be 75 in April of this year. IRA owner is age 75 to determine Sue s RMD. Sue s RMD for Primary and contingent beneficiaries You may have noticed when opening an IRA that you can name primary and contingent (secondary) beneficiaries. The primary beneficiary is entitled to receive the inherited balance first. The contingent beneficiary inherits the funds only owner. You can select one or more primary and/or contingent designate the percentage each receives Spouse versus nonspouse beneficiaries It is important to know the rules regarding retirement plan and IRA beneficiaries and the impact those rules may have on who assets the year after your death. A nonspouse beneficiary who an Inherited IRA. A spouse who inherits an employer sponsored plan may transfer either to an Inherited IRA or to their own IRA. inheritance process and create a significant legacy for your heirs. Naming your spouse Naming your spouse as beneficiary may make sense for many married couples. When an IRA passes have on the surviving spouse s estate at the time of his/her death.

3 Naming a nonspouse an Inherited IRA and take annual RMDs to stretch them over their own single life expectancy. Some options will depend on whether the IRA owner died before or after the RBD. retirement plan will be included in their ordinary income for that nonspouse beneficiaries may not roll inherited assets into their own IRA. Talk with your beneficiaries so they understand your especially for younger heirs. Other nonspouse beneficiaries Naming an estate that your assets enter the probate process. Distributions from the Inherited IRA may be taxed at the federal income tax rate for an options through an Inherited IRA would not be available to your heirs. Naming a trust possible the trust would pay higher taxes on the money than your heirs would because trust tax rates escalate within their tax trust as beneficiary may shorten the time period over which your beneficiaries can stretch s. Naming a charity when a charity and individual beneficiaries are named on the lifetime of their inherited portion. Discuss with your advisors the benefits of setting up a separate IRA for assets you charity. Beneficiary options Whom you designate as your beneficiaries will determine their from an inherited IRA. This is because the s are taken others do not. Only spouses have the ability to roll the advantaged status of the account and defer income taxes until rules will apply based on your spouse s age. If the penalty on s from his or her IRA. This strategy will exhaust the entire of the in the year received and may place the beneficiary in a higher tax bracket. If a nonspouse beneficiary days to roll over the inherited assets into his or her own IRA. within nine months after the account owner s death. The beneficiary cannot select who receives the disclaimed portion of or contingent beneficiaries listed on the IRA beneficiary form. If assets would go to the beneficiary specified under the default rules in the IRA custodial agreement. An Inherited IRA allows beneficiaries taking s. The account titling will always include the name of the deceased IRA owner or plan participant along with this account. The benefit of this account is that the beneficiary has the option to distribute the funds over a longer period of time and are only taxed on the taxable amount of the funds This option is available for Inherited Roth IRAs or Inherited Traditional IRAs and is often referred to as a stretch IRA. 1 Beneficiaries will have to take annual RMDs over their single life expectancy. Nonspouse beneficiaries will begin the year following the death of the IRA owner or plan participant. Taking RMDs provides a way to keep the money invested tax advantaged over a longer time frame. 3

4 amounts may build to a substantial legacy. This option is available for Inherited Roth IRAs and for Inherited Traditional IRAs if the owner died must be distributed no later than five years from the end of the year in which the IRA owner or plan participant died. This can help avoid having to pay taxes on the entire amount in the The following table summarizes the options when your beneficiary inherits the funds and whether you have passed away before or after your RBD. Your beneficiary will need to take s whether they inherit a Roth or a Traditional IRA. Calculating your Inherited IRA RMDs One of the options available to individuals inheriting an IRA is to take s from the IRA over their life expectancy Beneficiary options IRA rollover Lump-sum Disclaim -expectancy Five-year s Spouse beneficiary Owner dies before RBD Spouse beneficiary Owner dies after RBD Nonspouse beneficiary Owner dies before RBD Nonspouse beneficiary Owner dies after RBD Look through trust beneficiary Owner dies before RBD * Look through trust beneficiary Owner dies after RBD * Estate/non look-through trust Owner dies before RBD * Estate/non look-through trust Owner dies after RBD * ** Charity Owner dies before RBD Charity Owner dies after RBD ** * In some instances for a trust and estate beneficiary certain means that instead of using a new divisor from the meaning they obtain a new divisor every year. Keep in mind that than December 31 of the year following the deceased IRA owner s year of death. Key considerations Nonspouse RMD Formula Prior Year-End Value Single Table divisor for attained age in year following IRA owner s year of death ( _ 1 for each ) subsequent year = RMD Spouse beneficiaries beneficiary has two options. They can either assume the IRA as their own or transfer the funds to an Inherited IRA. Both options spouse under age 70½ has the ability to delay RMDs until they Spouse RMD Formula Prior Year-End Value Single Table divisor = RMD

5 Single Expectancy Table** Age Expectancy Age Expectancy Age Expectancy Age Expectancy * 1.0 **Source IRS Publication 590 need to take RMDs until the deceased spouse would have RMDs until the deceased account holder would have turned age 70½. A surviving spouse always has the ability to roll the s. Trust beneficiaries While we won t discount the effectiveness of using a trust as a beneficiary in certain situations (a special needs beneficiary or assets outright to the intended beneficiaries unless there are some exceptional circumstances compelling investors to leave the assets to a trust. This is because individuals named as outright beneficiaries can take advantage of the stretch IRA strategy and will be taxed at their individual tax rate. Children from prior marriages primary beneficiary with your children as the contingent beneficiaries. The problem is that when you die your spouse could roll the account into his or her own IRA and name new children by the prior marriage would get nothing at your spouse s death. 5

6 some downsides that were previously discussed. Another alternative might be to establish multiple IRAs now as part of your estate plan. One IRA naming your spouse as beneficiary might hold a percentage of your retirement assets; the balance of your IRA assets might be held in (an)other account(s) naming your children as primary beneficiaries. This helps assure that all your loved ones can benefit from your legacy. Remember Below are important facts to know when retirement assets are rollover process. IRA they inherit to their own IRA. year of death must be distributed by the beneficiaries from the Inherited IRA by December 31 of the year of death. The beneficiaries are only responsible for their portion of the RMD based on the portion of the IRA they inherited. They will owe ordinary income tax on any taxable portion of the. death. from an Inherited IRA no matter their age as this is a death. must take an RMD from the Inherited IRA annually by December 31. Inherited IRA. This allows the named successor to continue taking RMDs over the original beneficiary s life expectancy RMDs will be based on the age of the trust s oldest beneficiary. convert to an Inherited Roth IRA. Inherited Roth IRA. Stay up to date beneficiaries and it s best to consult with your legal and financial advisors to align with your current estate plan. Be sure to review your retirement assets to be distributed. You can update your beneficiary designation form so we have it on file. time retirement planning with Wells Fargo Advisors Wells Fargo Advisors offers strategies and guidance to help see you to and through retirement. As we meet with you to relationship with our company as well as your broader financial you pursue your goals. Approaching retirement with Wells Fargo Wells Fargo name for more than 150 years. As one of the lifetime retirement planning with an engaged and enduring interest in the future you hope to achieve. more information and to help you review and update your beneficiary designations. 1 Stretch IRA strategies are designed for investors who will not need the money in the account for their own retirement. There is no guarantee that there will be assets remaining in the account at the time of the IRA owner s death. INVESTMENT AND INSURANCE PRODUCTS: NOT INSURED BY FDIC NO BANK GUARANTEE MAY LOSE VALUE Please Note: This material has been prepared for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. The accuracy and completeness of the information is not guaranteed and is subject to change. It is based on current tax information and legislation as of April Since each investor s situation is unique, you need to review your specific investment objectives, risk tolerance, and liquidity needs with your financial professional(s) before a suitable investment strategy can be selected. Also, since Wells Fargo Advisors does not provide tax or legal advice, investors need to consult with their own tax and legal advisors before taking any action that may have tax or legal consequences. Wells Fargo Advisors is the trade name used by two separate, registered broker-dealers: Wells Fargo Advisors, LLC, and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company Wells Fargo Advisors ECG

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