Beneficiary Basics for Traditional IRA Owners

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Beneficiary Basics

Individual Retirement Account owners who name specific beneficiaries to their account may be saving their heirs a number of headaches down the road. Here’s why: Accounts that do not have named beneficiaries generally become part of the overall estate, which may have to go through probate — an often time-consuming, court-supervised process that handles the distribution of a deceased person’s property and the final management of his/her affairs. In most cases, if the account goes through probate it may need to be liquidated in as little as five years — with taxes due as soon as distributions are made.

On the other hand, an IRA with a named beneficiary(ies) can potentially provide continued tax-deferred growth potential and a lasting financial legacy to family members.

Spousal beneficiaries have maximum flexibility

Spouses who inherit IRA assets have three primary options for managing the money. First, they can convert the decedents IRA into their own IRA. This allows them to:

  • Continue making contributions to the account.
  • Delay distributions until reaching age 70 ½.
  • Name their own beneficiaries.

Second, they can rollover the assets to a beneficiary IRA, which would allow them to:

  • Take distributions based on their own life expectancy.
  • Wait until the year after the decedent would have turned age 70 ½ to begin taking distributions.


Non-spousal beneficiaries can “stretch” benefits

Non-spousal beneficiaries (including children, grandchildren and others) have three options as well. They can:

  • Take the distribution either as a lump sum
  • Spread the distribution over five years
  • Transfer the inherited assets to a beneficiary IRA

The third option may provide the maximum benefit to a family, as distributions will be “stretched” over the beneficiary’s life expectancy. Depending on a beneficiary’s age, this can potentially result in a sizable benefit over the course of his or her lifetime. In cases where multiple beneficiaries are named on the same account, the oldest beneficiary’s life expectancy will apply. Note that non-spouse beneficiaries cannot contribute to the account or “commingle” (combine) the assets with other IRA’s or qualified plan assets. Also some IRAs may require that a spouse sign a written consent allowing a non-spousal beneficiary to be named.

Naming a trust as beneficiary

Irrevocable trusts (or those that become irrevocable upon the death of the account holder) can also be named beneficiaries, with the stipulation that the trust benefit specific heirs. This may be an appropriate strategy in the case where the account holder’s ultimate wish is to benefit relatives who are minors.

It’s important to keep beneficiaries up to date, particularly if there are changes (e.g., divorce or death of a beneficiary) within the family structure. Beneficiary changes are not complicated or difficult to do. This process is normally accomplished by completing the correct form and filing it with the plan administrator.

A fund’s investment objectives, risk, charges and expenses should be considered carefully before investing. The prospectus includes this and other important information about the fund. To obtain a prospectus, call your financial professional, John Hancock Investments at 1-800-255-5291 or visit our web site at www.jhinvestments.com. Please read the prospectus carefully before investing or sending money.

This material does not constitute tax, legal or accounting advice and neither John Hancock nor any of its agents, employees or registered representatives are in the business of offering such advice. It was not intended or written for use and cannot be used by any taxpayer for the purpose of avoiding any IRS penalty. It was written to support the marketing of the transactions or topics it addresses. Anyone interested in these transactions or topics should seek advice based on his or her particular circumstances from independent professional advisors.