IRA Required distributions, taxation and beneficiary designations are among the most often overlooked aspects of retirement planning

Required distributions, taxation and beneficiary designations are among the most often overlooked aspects of retirement planning – and yet these are some of the most important issues. There is a common saying that proves true, “If you don’t have a plan for the distribution of your IRA, the IRS has a plan for you.”

In their Sunday column last week, the Pittsburgh Post-Gazette focused on these issues, referring them to quite aptly as “exit strategies.”

One highlight of the article is the importance of designating contingent beneficiaries. Most IRAs are set up to pay to a designated beneficiary (usually a spouse) in the event of the owner’s death. However, care also should be taken to designate one or more contingent beneficiaries, in the event both the account holder and the designated beneficiary die at the same time – as could conceivably happen with a married couple. By failing to name contingent beneficiaries, the IRS rules require the IRA to be paid to the decedent’s estate, thus subjecting the IRA funds to probate, and requiring them to be completely paid out over a five-year period. This means the entire amount will be counted as income over a very short time, resulting in an unnecessarily large tax bite.