Unlock the Power of IRA Bequests: Understanding Tax Implications

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One of the biggest mistakes you can make in estate planning is leaving the wrong asset to the wrong heir.  

You’ve spent a lifetime building your IRA nest egg, and now you’re considering how to pass it on to your heirs. This is where IRA bequests come into play. By designating beneficiaries, you ensure your hard-earned savings go where you want them to. 

But what are the tax implications when it comes to an inherited IRA? Let’s break down the details:

The Tax Reality for Heirs

IRA bequests may seem like a straightforward way to transfer wealth, but there’s a tax catch. When your heirs inherit an IRA, they only have 10 years to withdraw the entire balance and the distributions are taxed as ordinary income.

This bequest, in addition to providing a financial gift, also extends a tax burden. It directs a portion of your gift to the IRS, reducing the inheritance your heir receives.

Furthermore, depending on the value of the IRA, the additional income could potentially push your heir into a higher tax bracket, eating away even more of the inheritance and further diminishing the legacy you intended to leave behind.

The only exceptions to the 10-year distribution requirement are if your beneficiary is…

  1. Your spouse or minor child.
  2. A disabled or chronically ill individual.
  3. An individual who is not more than 10 years younger than you.

Depending on your goals, an IRA may not be the best asset to leave to family; your heirs may not receive the full value you intended and could end up with additional tax consequences. Deciding which asset goes where is an important factor to consider when working through estate plans.  

The Charitable Alternative

If you are considering any charitable giving through your estate or want to reduce or eliminate the tax burden an inherited IRA can create for your heirs, designating Focus on the Family as a beneficiary of your IRA can be a strategic way to achieve this goal.  

As a nonprofit organization, Focus is not subject to the income tax IRA distributions create. That means 100% of your gift will go directly to the programs you love and not to unnecessary taxes, creating a legacy with BIG impact on parents, families, mothers and their babies, and the culture for Christ!

Choosing Focus on the Family as a beneficiary of your IRA offers a win-win scenario. You reduce the tax implications on your heirs, potentially leaving them more wealth, while also helping families thrive for generations to come! It's a powerful way to align your financial legacy with your values and passions.

How to Add a Beneficiary to Your IRA

Adding a beneficiary to your IRA is an easy process. It typically involves completing a beneficiary designation form provided by your IRA custodian or financial institution. You can name primary and contingent beneficiaries, and have the flexibility to allocate specific percentages to each.

For more information on this process, consult your IRA custodian or financial institution’s guidelines or refer to IRS guidelines on beneficiary designations.

Have you designated Focus on the Family in an IRA or other estate plan?

Have questions on this or other estate planning strategies?

For comprehensive understanding of the tax regulations around inherited IRAs, see IRS Publication 590-B..

Focus on the Family does not provide legal, tax, financial, or other professional advice. You should consult professional advisors concerning the legal, tax, or financial implications of your charitable activities.


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