MONEY MATTERS: IRA beneficiaries an important decision

When you establish a Roth IRA you're generally required to complete a beneficiary designation form with your custodian or trustee.
The beneficiary (or beneficiaries) you name will receive the remaining funds in your Roth IRA after you die. Although choosing a beneficiary may seem straightforward, there are actually several tax and non-tax points to consider and the beneficiary decisions you make now may have significant consequences in the future.
Whether you have a Roth IRA or a traditional IRA, your primary goal should be to choose beneficiaries for whom you want to provide. Because Roth IRAs are different than traditional IRAs, the considerations for choosing beneficiaries may differ. Unlike traditional IRAs, Roth IRAs are not subject to the lifetime required minimum distribution rules. In addition, qualified distributions paid to your Roth IRA beneficiaries are free from income tax.
Who can you designate as your Roth IRA beneficiary? Basically, you have the same options the owner of a traditional IRA have. Because Roth IRAs are different from traditional IRAs, some special considerations may apply.
Your beneficiary choices generally include the following options.
If your surviving spouse is the sole designated beneficiary of your Roth IRA he or she will have certain options that are not available to other types of beneficiaries. For instance, your surviving spouse can generally elect to be the new account owner of the inherited Roth IRA. Alternatively, your surviving spouse can generally elect to roll over the inherited funds to his or her new or existing Roth IRA.
In either case, the inherited funds will be in a Roth IRA in your surviving spouse’s own name. Other types of beneficiaries must withdraw from the Roth IRA that is in your name.
This outcome is significant for two reasons. No. 1, as a Roth IRA owner, your surviving spouse can name new beneficiaries of his or her choice. These new beneficiaries will receive the funds remaining in the Roth IRA after the death of your surviving spouse. By having new beneficiaries, the period of time for the tax-free accumulation of earnings in your Roth IRA is extended.
No. 2, as a Roth IRA owner, your surviving spouse will not be subject to the lifetime required minimum distribution rules. He or she can take distributions from the account if desired, but there is no requirement that he or she do so. This creates the opportunity to preserve the funds in a tax-advantaged environment for the new beneficiaries.

Of course, these are not the only options available to a surviving spouse beneficiary. Your surviving spouse can also elect to disclaim the inherited Roth IRA funds or take post-death distributions under the life expectancy method or the five-year rule. In most cases, though, it will be in a surviving spouse's best interest to exercise one of the unique spousal options.
You may want to name your child, grandchild or another individual as the beneficiary of your Roth IRA. As mentioned, a non-spousal beneficiary must take the Roth IRA distributions in one of the following two manners:  By the end of the year during which the fifth anniversary of the account owner's death occurs or over the remaining single life expectancy of the beneficiary, with the first distribution starting no later than Dec. 31 of the year following the year that the account owner died
If you designate a grandchild or other young beneficiary for your Roth IRA, he or she may be able to take post-death distributions over a long payout period using the life expectancy method. This could maximize tax-advantaged growth opportunities by allowing some of the funds to stay in the Roth IRA for many years. And unlike a traditional IRA, post-death Roth IRA distributions may be free from income tax.
You can name a qualifying trust as the beneficiary of your Roth IRA if the IRA custodian or trustee allows such a designation. If all requirements are met, the beneficiaries of the trust can be treated as the designated beneficiaries of the Roth IRA. When a qualifying trust is the beneficiary of a Roth IRA, post-death distributions are calculated based on the life expectancy of the oldest trust beneficiary, which can reduce the time that distributions can be spread out.
Still, a trust can be an especially useful tool if you want your children (or other individuals) to benefit from your Roth IRA, but want to maintain some control over their access to the funds.
If you name your estate as the beneficiary of your Roth IRA the money in the account first goes to your estate,  then what's left passes to your heirs according to the terms of your will or through the laws of intestacy.
Naming your estate as beneficiary is usually not advisable. First of all, you sacrifice some planning options.
Also, the Roth IRA will have to pass through the probate process instead of going directly to your loved ones. This can be costly and protracted. And it can unnecessarily expose your Roth IRA to creditors. Finally, you may not be able to stretch distributions out over the lifetime of an individual beneficiary. Generally, the five-year rule will apply.

There are several factors you may want to consider when selecting beneficiaries for your Roth IRA. Although your primary concern may be to provide financial security for your loved ones, you should also take into account the ages and needs of your loved ones. In addition, you should keep the Roth IRA distribution rules in mind, as well as the beneficial income tax treatment that the Roth IRA may afford.

Because choosing a Roth IRA beneficiary is an important decision, you may want to select a beneficiary with the help of a tax advisor or other qualified professional. In addition, you should review your beneficiary choices periodically to ensure that they continue to be appropriate, since your financial and personal circumstances (and those of your beneficiaries) may change over time. Fortunately, you'll generally be free to add or remove beneficiaries whenever you want (though certain restrictions may apply).

As discussed, if the five-year holding period is satisfied, your beneficiaries will not have to pay income tax on your Roth IRA funds after you die. Moreover, funds left in a Roth IRA continue to accumulate free from income tax. So, the longer the funds remain there, the more your beneficiaries may benefit from tax-free growth. This is where your choice of beneficiary can play a critical role; your beneficiary designation may determine (in part) how long the funds can remain in the Roth IRA after your death.

To obtain more information regarding this, listen to our weekly radio talk show “WHTC Money Matters” on 1450AM at 10:10am every Saturday Morning.  Our next radio show's topic is “5 Strategies for surviving tough times” on August 16, 2008.
For future editions we want to hear from you, please email or call us with your questions or comments:  Koele Godfrey Investment Group, KoeleGodfrey@lpl.com 616-931-1223, Toll Free 866-512-7164.  We are located at 123 E Main Ave, Zeeland.  Visit our Website at www.KoeleGodfrey.com for more information.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investments may be appropriate for you, consult your financial advisor prior to investing.  Securities and Financial Planning offered through LPL Financial, Member FINRA/SIPC