What Are the Options Available in Naming an IRA Beneficiary?
When you open an IRA account, you are asked to name a beneficiary or beneficiaries to receive the value of the IRA at your death. You can also change beneficiaries during your lifetime. There are generally three classes of beneficiaries:
Primary Beneficiaries: A primary beneficiary is your first choice of who you want to receive the IRA value at your death.
- Secondary Beneficiaries: A secondary beneficiary receives the IRA value if your primary beneficiary does not survive you.
- Final Beneficiaries: A final beneficiary receives the IRA value if none of your primary or secondary beneficiaries survive you.
If you do not have a named beneficiary who survives you, your estate becomes the beneficiary and will be taxed on the value of your IRA at your death.
If you’re married, you can name your spouse as your IRA beneficiary. Alternatively, you can name multiple beneficiaries. If, for example, you have three children, you could name them as the three primary beneficiaries, specifying the percentage of the IRA each will receive. Or, you could name your spouse as the primary beneficiary and your children as the secondary beneficiaries.
If you have several IRAs, you can name different beneficiaries for each IRA. If you have both a regular IRA and a Roth IRA, however, keep in mind the different income tax treatment of these two types of IRAs: the beneficiary of a regular IRA will have to pay income tax on IRA distributions, while the beneficiary of a Roth IRA will receive distributions income tax free.
Certain situations require special care in designating IRA beneficiaries. These include marriages in which one or both spouses have children from a prior marriage, as well as a child or grandchild with a disability or a drug or alcohol problem that might impair their judgment or use of funds from the IRA. In this situation, naming a trust as beneficiary can establish some control over how the funds are used after your death.