When mapping out your estate, you need to know the role of IRAs in estate planning. Your investigation should include learning how to make sure your beneficiaries can be best shielded from penalties and taxes upon your death. After all, you didn’t work hard for almost 90 percent of your life only to hand those earnings over to the government when you die.

The Role of an IRA in Your WV Estate Plan

An IRA, an individual retirement account, is an investment account created to save funds specifically designated for retirement. This investment account can include simple cash deposit, stocks, bonds, mutual funds, or a combination of any of these types of instruments.

To best protect the heirs of your estate, it is important to understand the role of IRAs in your estate plan as well as the consequences of inheriting an IRA in WV. IRAs have strict rules regarding the disbursement of funds, and those rules are binding on the original account owner as well as any beneficiaries that may later inherit the account.

Types of IRAs

There are several types of IRAs, and each has its own disbursement rules and tax consequences. Below is a simplified overview of some of the different types of IRAs you can open as part of your retirement planning. 

A traditional IRA is an account into which you can make pre-tax or tax-deductible contributions while you are working. This means there is no income tax on the funds deposited in this account at the time of the deposit. Funds withdrawn from this account after you reach retirement age are taxed as income. 

Contrary to traditional IRAs, contributions to a Roth IRA are not tax deductible. Instead, contributions are made using already taxed funds. There is no immediate tax benefit to this account. However, because the account was funded with taxed income, the disbursements taken in retirement are not taxable income. 

A Simplified Employee Pension Individual Retirement Account (SEP IRA) is a retirement account plan set up by small business owners to provide a retirement savings avenue for themselves as well as their employees. Contributions to a SEP IRA are tax deductible, or made before income is taxed, and income taxes are applied to qualified disbursements in retirement. 

You can have an IRA in addition to other retirement accounts such as a 401(k) or 403(b) plan through your employer. You can even have more than one IRA in your retirement portfolio and have those accounts at different banks or financial institutions. 

There are pros and cons to each type of account that you can hold, and some people have several different IRAs to meet their tax planning strategies. Tax planning for your retirement is important, but you should also consider any IRA in your WV estate plan as well. 

Who Can Inherit an IRA in Your WV Estate Plan?

You can designate any person or entity as a beneficiary to inherit your IRA upon your death. You can designate a surviving spouse, another heir, or a combination the two, designating a percentage of the IRA to each beneficiary. 

As discussed in more detail below, beneficiaries can be subject to tax and other consequences of inheriting an IRA in WV. The consequences can also affect the beneficiary’s taxable rate. You and your beneficiaries should consult a trust lawyer in WV to discuss their options if they inherit your IRA.

Mitigating Your Beneficiaries’ Consequences of Inheriting an IRA in WV

Various estate tax and income tax consequences arise from inheriting an IRA in your estate plan. Generally, the rules for beneficiaries affect the timing and amount of distributions to the beneficiary from the inherited IRA. The type of IRA and your relationship with the beneficiary dictate the rules that apply to the person who inherits your IRA. 

A spouse who is the beneficiary of an IRA in your estate plan has several options. One option is for the spouse to treat the inherited IRA as his or her own and become the account owner. Alternatively, your spouse can roll the funds over into another IRA in his or her name, either an existing IRA or a new IRA opened for the rollover. Finally, a spouse can choose to be treated as a designated beneficiary of your IRA.

A beneficiary who is not your spouse will not be allowed to treat the IRA as his or her own. Rollovers and future contributions from the beneficiary are not allowed. But the beneficiary can set up an IRA in the name of the deceased for the benefit of the beneficiary and have the inherited IRA balance directly transferred there. Additionally, IRS rules require the non-spouse beneficiary to take minimum annual disbursements (required minimum distributions) from the inherited IRA, and those disbursements are treated as individual income for the beneficiaries. 

Consider tax planning for yourself and your beneficiaries when including an IRA in your estate plan. A spouse beneficiary can treat an inherited IRA account as his or her own and delay disbursements based on the relevant retirement timeline, but a non-spouse beneficiary’s income tax burden will increase based on the amount of required disbursements.

Where to Go for Help with an IRA in Your WV Estate Plan

Including an IRA in your WV estate plan requires careful thought and knowledge about the tax consequences of these retirement accounts. Remember that the consequences affect not just your retirement—your IRA beneficiaries will also be subject to consequences of inheriting an IRA in WV. To make the most of your retirement and estate planning, for yourself and your beneficiaries, contact Anna M. Price at Jenkins Fenstermaker to discuss your options regarding estate planning in WV. You may reach her toll-free at 866.617.4736 or complete Anna’s online contact form. She’ll work with you to determine the necessary steps to take to carry out your comprehensive estate plan.