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Tax consequences for different IRA beneficiary designations

As with most assets, individual retirement accounts are best left to whomever is most deserving or would derive the greatest benefit from the ownership of the asset. People in Colorado who have IRAs often leave them to spouses, children or charities. The tax consequences and other implications of a bequest may be different depending on who gets the asset, and it's important to avoid mistakes with what can be a person's most valuable property upon death.

In a situation where the designated beneficiary is the spouse of the decedent, he or she will have the option to roll the retirement account into an IRA of his or her own. A non-spouse designated beneficiary can roll the proceeds into an inherited IRA and thereby continue the tax benefits much longer than if they just take the money. It is not enough, though, to simply name a child or other non-spouse as the beneficiary in a will; the individual who owns the IRA must fill out the beneficiary designation document for the inherited IRA to be an option to the recipient.

Those who wish to give their IRA assets to charity should consider naming a donor-advised fund as the beneficiary. Giving the IRA to charity will in many cases make the estate of the deceased eligible for a charitable deduction.

In most cases, it is less advantageous to all parties to name the estate of the deceased as the beneficiary of the IRA. Individuals who have questions about the tax and other consequences of retirement accounts might want to talk with a lawyer. A lawyer with experience in estate planning might be able to help by developing a comprehensive plan for the payment of liabilities and distribution of assets upon death.

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Samuel J. Owen, P.C.
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