Question: I live in New York State. Can I have my son as the beneficiary for my IRA and Roth IRA account? If yes, what do I need my husband to sign? Thank you. Wendy, Lockport, NY
Answer: You can have your son as the primary beneficiary of your IRAs. Your husband shouldn’t need to sign anything, since New York isn’t a community property state. (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are. And, if you elect, Alaska is.) The forms I’ve seen have the spouse sign — and, if necessary, notarize — a section of the same form as the IRA beneficiary designation.
It’s critical that everyone name a beneficiary for their retirement plans, assuming you’d like to exercise some control over where the money goes.
Now, it’s a shame, but IRAs are very complicated; even naming a beneficiary is. I’ll try to boil down the rules as much as possible.
You can name your spouse, children, grandchildren, another individual, a favorite charity, or set up a trust and name it a beneficiary. The tax and estate treatment varies depending on the beneficiary, however.
For instance, it’s common to name the spouse as the primary beneficiary and the child or children as secondary beneficiaries. The reason is that the tax-sheltered treatment of an IRA is preserved for the widow or widower. He or she can treat it like their own IRA. No fuss. No muss. (Everything I’m describing is for IRAs in which you haven’t reached age 70 1/2 when you would be required to start taking minimum distributions on your traditional IRA. Like I said, there isn’t anything easy about IRAs.)
The tax treatment and rules are different for “non-spousal” beneficiaries, such as your son. He would have two options. The first option is the 5-year rule. By the end of the fifth year after the IRA owner’s death, the beneficiary has to have cashed in the IRA and pay any ordinary income taxes owed on it. (That’s usually not an issue with the Roth; taxes are owed on traditional IRAs.)
The other option is for the beneficiary to withdraw the IRA over their life expectancy. They pay taxes on the sum withdrawn every year — again, if taxes are owed. They have to elect this choice by Dec. 31 of the year after inheriting. There is no penalty for early withdrawal in either case.
Here’s a link to a longer article from Bankrate.com that goes into greater depth about the various options, along with an IRA beneficiary calculator.
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