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Smart money/Coming Soon

IRAs and Wills Don't Mix

IRAs and willsA Will is a legal document under state law where you name a person to manage your estate and divide your property after you die. Property in your estate must pass through “probate”, which is the process under your state’s law of how your estate is administered and who gets your property. Ideally, you should have a Will. If you don’t, then state law will decide who gets your property after you die. That might not be what you want, so it’s better for you to decide who gets what by having your own Will.

If you also have an IRA, you probably named a beneficiary of that account on the custodian’s beneficiary form. The IRA beneficiary form decides who gets your IRA after your death; not your Will. The only time your Will would control who gets your IRA is if your estate is the beneficiary. Generally, it’s not a good idea to name your estate as the beneficiary of your IRA.

Regardless of whether you have a will or not, if your estate is the beneficiary of your IRA, then your IRA must go through the probate process. That could be costly and time consuming. But far worse than that, when the estate is the beneficiary of an IRA, the death distribution options are limited and your IRA funds will have to be paid out more quickly.

Let’s say your estate is the beneficiary of your IRA and your children are the beneficiaries of everything in your estate. If you die at age 65, your children who get your IRA through your estate will only have 5 years to distribute those funds out of the IRA. They can’t use a stretch IRA and stretch distributions over their own life expectancies because the estate was the beneficiary of your IRA. An estate does not have a life expectancy. If we instead assume you die at age 75, then your children will have to take death distribution out over your remaining life expectancy. That’s not ideal because your children’s life expectancies are much longer than yours because they’re younger. What this means is that they’ll have much less time to deplete the IRA versus if they could use their own life expectancies (the stretch IRA). Again, the estate as IRA beneficiary put them in a bind by prohibiting them from using the stretch IRA.

-By Joe Cicchinelli and Jared Trexler


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Thursday's Slott Report Mailbag

Consumers: Send in Your Questions to [email protected]

You recently said that a 401(k) distribution would add to your MAGI (modified adjusted gross income) for the purpose of determining if you are subject to the 3.8% healthcare surtax. What about Roth IRA distributions? Would they also count towards your total MAGI income for surtax purposes?


IRA distributions are exempt from the 3.8% surtax, but taxable distributions from IRAs can push income over the threshold amount, causing other investment income to be subject to the surtax. Because Roth IRA distributions are generally tax-free, they don’t count towards your total MAGI.