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Roth IRA Beneficiary Form is Very Important

Do you know who is your beneficiary on your Roth IRA?  I hope so, and I hope you understand who it should be.  Some of the most important benefits of a Roth IRA over a standard IRA are the tax benefits to your heirs. If you have not named a beneficiary for your Roth IRA, then the proceeds will likely go into your estate.  This will then be paid out of your estate in accordance with the will and the laws in your state.  It will likely be settled and paid to the heirs quickly.  So that will be the end of the tax free earnings for your heirs.Aug28$06

On the other hand, most people do have a beneficiary named for their Roth IRA, and it is usually their spouse.  This is much better than letting it go into your estate.  This way, the IRA is allowed to be commingled with your spouse’s own Roth IRA and the mandatory disbursement rules would be based on the spouses life expectancy. There is much more you can learn at the IRS site concerning disbursements for beneficiaries.

Name your IRA beneficiary now and keep a copy  of the accepted "signed" form in your house with your will or somewhere with all your important papers.  You must be able to prove you have named the beneficiary and in some cases the Roth IRA account managers have lost the form or forgot to transfer it, etc.  Trust me, keep a copy to back this up.

You can also name a secondary beneficiary, so in case the primary has died before you, it would go the them.  The secondary is usually your children, but you must name them.  Actually , depending on how much you have in your Roth IRA , you may wish to apportion some to your children as a co-beneficiary.  This will allow them to extend the tax-free earnings based on their age and life expectancy, and will reduce the total amount in your spouses estate.  This can be very important as you approach a total estate of 2 million dollars.   Everyone can pass 2 million dollars to their heirs , estate tax free, but every dollar over that amount is currently taxed at 45%.  OUCH!

Imagine if you had $2.5 million.  $2 million would not be taxed, but your heirs would lose $225,000 dollars of the other $500,000.  That would not happen if you plan properly.  Take the time to learn this stuff.

Bottom line is the beneficiary form is like a will for your Roth IRA. Be sure you have one.

This web site offers general information for managing personal finances and does not recommend specific financial actions.  For financial advice tailored to your situation, please contact an expert such as a CPA or a personal financial advisor.

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