If you do not need the income from IRA or retirement plan assets, it might be best to convert to a Roth IRA now. You pay income tax on the converted amount upfront, but your heirs inherit a tax-free asset. They still are required to take minimum distributions, but when they withdraw money from the account they do not owe any income tax.
You can roll over small amounts of your IRA each year rather than convert to a Roth all at once. Heirs other than your spouse can't change an inherited IRA to a Roth IRA after your death. On the other hand, they can switch an inherited qualified plan such as a 401(k) to a Roth IRA. This may weigh upon your decision to roll over your retirement plan to an IRA.
If you name a charity as a beneficiary of your IRA or qualified plan, list the percentage of the amount you wish to leave the charity rather than a dollar amount. Failure to list a percentage amount leads to a no designated beneficiary status for the account. This means your remaining heirs are forced to withdraw funds from the IRA within five years rather than stretching distributions over their lives. The end result is that your heirs pay more in tax immediately.
Be careful if you're in a second marriage with children from both spouses. It's very easy to disinherit your children unintentionally by naming the second spouse as sole beneficiary of your IRA or retirement plan. In any situation involving children of multiple spouses, you need to do extra planning to ensure your estate plan is in order.
A good rule of thumb is to review all beneficiary forms once a year. Often we go through major life changes such as births, marriage, divorce or deaths without remembering to update the estate plan. There are countless horror stories of accidentally leaving an account to an ex-wife.
IRAs and retirement plans present great opportunities to leave tax-efficient assets to your heirs. But the beneficiary designation decision is often not that simple. It helps to consult a trusted financial adviser for help with estate planning and beneficiary designations.
-- By Blair Hodgson DuQuesnay, founder and CEO of Ignite Investments and Planning a registered investment advisor domiciled in the state of Louisiana. She posts financial insights regularly on her blog.
AdviceIQ is a network of financial advisors that writes insightful articles for the public about investing and wealth management. All articles are edited by AdviceIQ's editor in chief, Larry Light. AdviceIQ certifies that all its advisors have no regulatory infractions.