Beneficiaries Under Joint Accounts and IRA’s

The Facts: I have an IRA with a balance of $400,000 and a life insurance policy with a $400,000 death benefit. I was advised that if I name my son Mark as the beneficiary of my IRA, and my son Steven as the beneficiary of the life insurance, Mark will end up with less money.

The Question: Is that true?

The Answer: Yes. When life insurance proceeds are paid to the named beneficiary, they are not subject to income tax. In contrast, funds in an IRA are subject to income tax when they are distributed to the named beneficiary. Although Mark may be able to spread distributions from the IRA out over his life time, allowing the assets in the IRA to grow, he will end up turning approximately one-third of each distribution made from the IRA to the IRS. If you want your sons to end up with exactly the same amount of money upon your death, it would be better to name them both as fifty-percent beneficiaries on both the IRA and the life insurance policy.

This article first appeared in the April 22, 2010 issue of the Times Beacon Newspapers

Linda M. Toga of The Law Offices of Linda M. Toga, P.C. is an East Setauket,New York attorney with a general law practice focusing on estate planning, real estate, marital planning, small business services and litigation.