Another installment of our reporter’s extended interview with noted retirement specialist Phil Cannella, founder and CEO of First Senior Financial Group and host of The Crash Proof Retirement Show™.
Question: Tell us about the ins and outs of beneficiaries.
Phil Cannella: No matter what type of retirement account you own, whether it’s an IRA or a 401(k), you better be sure that you name a living, breathing beneficiary to that account; somebody who has a pulse and a birth date.
Q: So a pulse is a requirement?
Phil Cannella: I know that sounds comical, but I’m trying to make an important point. If you pass your IRA to an estate, all taxes will fall due at your death. Income tax, inheritance tax, federal death tax—up to 95% of your account could vanish, depending on circumstances, where you live, the tax situation when you die. But by designating a beneficiary, your wealth and legacy will thrive and their options for growing that money will become available. And as we’ve talked about elsewhere, those options improve when that IRA account is converted to a Roth.
Q: Are there any other laws to consider?
Phil Cannella: One important law that you and your heirs should be aware of is the cutoff to begin stretching an IRA. They must begin taking RMD withdrawals the year they inherit the account. If they don’t, they could be forced to pay a 50% penalty on the RMD amount. Creating a family legacy is as important to your family as it is to you. The moments of your life are precious and valuable. Surely you and your heirs will want to do all you can so that generations in your family to come can prosper from them.
Q: So how do you actually go about this?
Phil Cannella: There’s only one proper way to assign your beneficiaries and that’s by filing a beneficiary form for every account you hold. You very likely filled out a beneficiary form when you opened the IRA, but if you didn’t, that’s the first thing you should do when you put this book down.
Q: Where would people get that form?
Phil Cannella: A beneficiary form is readily available from whatever financial institution holds custody of your IRA. For instance, if your IRA is held by Vanguard, call them to get a beneficiary form. On this form, you designate the primary beneficiary who will receive the holdings of the corresponding account when you pass. You’ll also list a contingent beneficiary…
Q: A contingent beneficiary?
Phil Cannella: Yes. The contingent beneficiary will receive the benefits if the primary beneficiary dies before the holdings are paid out. Many investors stop short of naming a contingent beneficiary usually because they aren’t aware of a law they can employ to prevent their IRAs from being absorbed by the government should their primary beneficiary predecease them. Designating a contingent beneficiary allows your IRA to keep its special tax status at your passing and not be lost to as much as 80% taxation. If your primary beneficiary predeceases you and you die without naming a contingent beneficiary, your IRA will be come part of your estate, must go through the agonizing process of probate and will be subject to all the taxation Uncle Sam can muster.
Q: Can all financial advisors guide you through this?
Phil Cannella: Unfortunately, this is yet another example of an age-favored IRA law that too many general practitioners, financially speaking, miss. Life will march on and the cycle will repeat with your heirs as they follow the same steps of designating beneficiaries and passing the family legacy down to the next generation.
Incoming search terms:
- phil cannella
- phil cannella ira