Who Should You (Not) Leave Your IRA To?
Based on tax treatment and required minimum distribution rules, these are the three best and four worst beneficiaries to name for your individual retirement accounts.

Individual retirement accounts are some of the most sensible investment vehicles. They are tax deferred, protected from most creditors and can easily be transferred to a beneficiary outside of probate. In addition, they do not have a true maturity date: For traditional IRAs, you have to take required minimum distributions (RMDs), mandatory withdrawals of a certain percentage of the account every year, starting the year after you reach age 70½ and increase as you age.
The major sticking point is what happens to these accounts upon your death: How can your beneficiaries optimize tax deferral and continue creditor protection? Who you leave these accounts to and how you leave them can either make or break these objectives.
The following beneficiaries are the best options when it comes to passing on your IRA:

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Your Spouse
When you die your IRA typically turns into an inherited IRA. This creates different RMD treatment than when you take the distributions as the owner of the account. The main exception to the inherited IRA issue is transferring IRAs to your spouse.
Your spouse is the only individual who has the option of transferring your retirement plans to his or her name at the time of your demise. If the surviving spouse is younger than the deceased spouse (which happens to be the case more often than not), the receiving spouse now uses her longer life expectancy, and the commensurate smaller required withdrawal percentage, for RMD purposes. This allows for smaller distributions, which means less taxable income and more funds to continue growing tax deferred.
Younger Individuals
The concept of stretching RMDs is somewhat misrepresented to the public and is contingent on whether you live past April 1st of the year following the year you reached age 70½. This is the actual time you must start taking RMDs or face a penalty. If you die before this time, meaning no one has ever taken an RMD from your IRA, your beneficiaries can stretch RMD distributions based on their life expectancies.
This is a great benefit to younger individuals: Though they have to take RMDs even if they are younger than 70½ years old (inherited IRAs must begin distributing by December 31st of the year after your death, no matter how old the beneficiary is), the percentages to withdraw are quite small based on the beneficiaries' long life expectancies. If you die after the required begin date, RMDs are based on the longer of either your life expectancy or your beneficiary's life expectancy.
A See-Through Trust
Leaving funds to an entity that is not an actual human, such as an estate or charity, completely ruins RMD optimization: The beneficiary must withdraw all funds within five years. This can lead to an income tax burden that you would have wanted your beneficiaries to avoid.
A see-through trust can receive RMDs based on the beneficiary's stretching abilities noted above (thus it "sees through" to their life expectancy), yet protect the proceeds by holding the funds in trust. This is particularly useful when a minor is the beneficiary of a trust, since a minor cannot receive these distributions outright because they cannot individually own property.
A see-through provision is often just one component of a trust, meaning it is often just one part of a larger document.
The following beneficiaries are the worst options when it comes to passing on your IRA:
Your Estate
Naming "my estate" as beneficiary to your IRA is the absolute worst thing you can do: You potentially lose creditor protection of the IRA, ensure the five-year withdrawal rule for your beneficiaries, increase court and accounting costs and increase the time and complexity of your probate estate.
Both A Person and a Non-Person
All beneficiaries to a trust must have a life expectancy (i.e. be human beings) or else the five-year rule for distributions applies. This mistake is usually made when an IRA owner leaves a large amount of the plan to family members and a small amount to a charity, such as 90% to children and 10% to a church. Remember that all of the IRA funds must go to natural beneficiaries for stretch RMD purposes: Even leaving just 1% to a non-person invokes the five-year rule.
One way around this shortfall is to move some funds to a separate IRA, and leave that IRA solely to charity. This will benefit all parties: The charity receives all of the funds in its IRA tax-free, and your beneficiaries receive inherited IRAs with stretch RMD treatments available to them.
An Older Person
Leaving IRAs to an older individual is clearly bad for RMD purposes since the distributions are withdrawn at a higher rate. Of course, if you want to leave some funds to an older person and have no other assets to transfer, then RMD treatment might not really be a major concern for you. However, if there is a choice to transfer non-retirement assets instead, then those would be preferable.
A Spendthrift or Person With Creditor Issues
Spendthrift beneficiaries who receive IRA funds are disasters waiting to crash. Remember that every penny taken out of an IRA, inherited or otherwise, is taxable income. So a person in financial straits would not only deplete an inherited IRA quickly, but would also have to pay income taxes for every withdrawal. In addition, in 2014, the Supreme Court decided an inherited IRA is fair game for creditors during bankruptcy judgments.
Instead of making your spendthrift relative the outright beneficiary of your IRA, consider naming a see-through trust and have another family member act as its trustee.
As is often the case in estate planning, knowing the nature of the asset itself is usually not enough: You should know the future nature of the asset and the individual who shall be receiving it.
Daniel A. Timins is an estate planning and elder law attorney and a certified financial planner, helping clients with wills, probate, living needs and Medicaid planning.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Daniel A. Timins is an estate planning and elder law attorney, as well as a Certified Financial Planner®. He specializes in Estate Planning, Surrogate’s Court proceedings, Real Estate Law, Commercial Law and Medicaid Planning. He is a graduate of Pace Law School.
-
‘Are You Better Off Than You Were 71 Days Ago?’ Cory Booker Marathon Senate Speech Highlights Tax Debate
Tax Policy A speech protesting Trump’s policies, including tax plans, breaks U.S. Senate records.
By Kelley R. Taylor Published
-
Stock Market Today: Stocks Are Mixed Before Liberation Day
Markets are getting into the freewheeling rhythm of a second Trump administration.
By David Dittman Published
-
Winning Strategies for Financial Advisers as Clients' Lives Evolve
How can the wealth management industry help make life transitions easier for the adviser and the client?
By David Conti, CPRC Published
-
How Advisers Can Establish Relationships With HNW Prospects
These strategies can help to build influence with high-net-worth individuals, who are often looking to an adviser for insight rather than solutions.
By Jeremy Green, CFP®, CTFA, CLU®, CEBS®, AEP®, EA, MSFS Published
-
The Three Biggest Fears Keeping Retirees Up at Night
Here are the steps you can take to put those fears to rest and retire with confidence so you can relax and enjoy the life you've planned.
By Pam Krueger Published
-
What Can a Donor-Advised Fund Do for You? (A Lot)
DAFs and private foundations go about helping charities (and those who donate) in different ways. Each comes with its own benefits and restrictions to navigate.
By Julia Chu Published
-
Estate Planning When You Have International Assets
Estate planning gets tricky when you have assets and/or beneficiaries outside the U.S. To avoid costly inheritance mistakes, it pays to understand the basics.
By Kelsey M. Simasko, Esq. Published
-
Three Essential Estate Planning Steps to Protect Your Nest Egg
After dedicating years to building your wealth and securing your future, make sure your assets are protected and your loved ones are provided for in the future.
By Nicole Farbo, CFP® Published
-
Is Chasing the American Dream Ruining Your Financial Life?
Too many people focus on visible affluence as a marker of success. Here's how to avoid succumbing to the pressure and driving yourself into debt.
By Anthony Martin Published
-
Retiring With a Pension? Four Things to Know
The road to a secure retirement is slightly more intricate for people with pensions. Here are four key issues to consider to make the most out of yours.
By Joe F. Schmitz Jr., CFP®, ChFC® Published