There is a lot of paperwork involved when you open an IRA account. You have to prove to the bank who you are and that your funds are legitimate. There is an account opening form and a beneficiary form to be completed. After you do all of that, then you get a multi-page, tiny print document, which is the IRA agreement. It does not require a signature, yet it is the contract between you and the IRA custodian that you have agreed to abide by. This document lays out the rules for your IRA account. Most of us do not even look at it, let alone read it.
Even if you choose not to read the entire document, here are some of the key items you should look for in your IRA agreement; especially if you want your named beneficiaries to be able to stretch distributions from the inherited IRA over their life expectancies. One thing to keep in mind is that the IRA custodian can, and often does, restrict options that are allowed under the tax code.
1. What is the default option when there is no beneficiary named for that IRA? Maybe your named beneficiary died, or the beneficiary form got lost. Who inherits your IRA? Many times, the default is your estate, which means a limited stretch option, at best, for your heirs.
2. Can a beneficiary name their own beneficiary? What happens when your beneficiary dies and there are still funds in the IRA? IRS allows a beneficiary to name their own beneficiary, who will continue to receive the original beneficiary’s annual required distributions. But many IRA custodians will require any remaining funds in the inherited IRA to be paid out to the deceased beneficiary’s estate, which is a fully taxable distribution. The remaining stretch of the inherited IRA is lost.
3. Can non-spouse beneficiaries move the inherited IRA assets in a trustee-to-trustee transfer to their own preferred IRA custodian after your death? Many custodians will only issue a check payable to the beneficiary. This is a taxable event to the beneficiary. The funds cannot be rolled over within 60 days to an inherited IRA. The stretch option is lost.
4. Will the IRA custodian accept a power of attorney, disclaimer, or a trust named as a beneficiary? These are all frequently used estate planning documents. IRA custodians are not required to accept these documents or follow instructions from the trustee/holder of these documents.
5. Check to see if the IRA custodian allows for stretch distributions to a named beneficiary. As hard as this may be to believe, there are still some IRA custodians out there who do not allow for stretch distributions to non-spouse IRA beneficiaries!