Lets Talk Money Online - Mind the details of your IRA

With tax season in full swing, now is a good time to make a contribution to a traditional IRA. This benefits you today with a potential tax deduction and in the future with a retirement nest egg. But beware of mistakes that can cost your beneficiaries in the future.

One mistake IRA owners can make is not designating beneficiaries of their IRAs. This can result in beneficiaries paying a larger income tax bill than anticipated. Your relationship to the loved ones who receive the proceeds of your IRA also determines how the proceeds are treated. Consider the following scenarios.

If you name your spouse as your IRA's beneficiary, for example, with proper planning, your spouse eventually can:

Keep your IRA as is.
Roll over your IRA into his or her newly opened IRA.
Roll over your IRA to his or her existing IRA.

If a person who isn't your spouse eventually receives your IRA proceeds, the options are fewer and tax benefits are less generous. That's because a beneficiary who is not your spouse:

May not commingle -- or combine with other IRA assets -- the inherited IRA.
May take the entire account balance anytime before the end of the fifth year after death. This option is not available if the deceased owner was age 70½ or older.
May be able to extend distributions over the beneficiary's lifetime.

Even with these less generous options, a non-spouse who is a designated beneficiary of your IRA may receive its proceeds in one lump sum or extend distributions over his or her lifetime. The key phrase here is designated beneficiary. Either way, that person will owe income taxes, but your beneficiary can continue to let the IRA's investments grow tax deferred and spread out tax payments for its taxable portion.

When the IRA passes to the estate, some problems arise. For example, it may take some time to pass through various tax jurisdictions and your distribution options might be more limited. Another problem is that your beneficiaries can't extend the IRA's distributions over their lifetime as they could if they were designated beneficiaries. Without being a designated beneficiary, your beneficiaries will have just five years to deplete the IRA.

Talk to an estate planning attorney and your tax and financial professionals to learn more about how IRAs can work for you and your loved ones.

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