The Savage Truth on Money by Terry Savage

This is the time of year you'll hear a lot about IRAs — because an IRA contribution is the last deduction you can still create for your 2012 tax return. You have until the date the return is due to make an IRA contribution, or add more money to the contribution you made during the past year, up to the 2012 limit of $5,000 (or $6,000 if age 50 or older).

For 2013, that amount increases to a $5,500 maximum IRA contribution, or $6,500 if age 50 or older. That kind of money can add up, at $5,000 per year. Over a 30-year period, earning just the stock market's historic average annual return of 10 percent, with dividends reinvested, you could have a retirement fund worth $910,000.

That would certainly make your retirement a lot easier than just relying on Social Security. So it's worth taking advantage of the opportunity to grow your IRA by making regular contributions.

But what happens if you die unexpectedly at an early age, leaving your retirement money to your heirs?

You should know some important rules about IRAs on death — so your huge nest egg isn't wasted, or exposed to taxes, because you fail to name the correct beneficiary, or because of ignorance on the part of your heirs.

The one step you must take now is to make sure you've named a beneficiary for your IRA (or your company retirement plan or pension plan at work). Money in retirement accounts passes directly to your named beneficiary at your death — and is not part of your estate for purposes of probate, a costly and public legal process.

And depending on whom you name as beneficiary, the person receiving the money has the opportunity to extend that tax-deferred growth, making your IRA live on in a meaningful way.

The beneficiary form you sign with your IRA custodian trumps even your will in determining who will get your retirement plan after death. In fact, a 2009 Supreme Court ruling unanimously held that an ex-spouse, who was still named as the beneficiary to a plan, was entitled to the cash — despite the fact that the man's will clearly stated that the money should go to his daughter.

If only the beneficiary forms had been updated after the divorce, a bitter and expensive family feud could have been avoided.

So here's your task: Contact every custodian of every IRA, 401(k), 403(b) or other retirement plan, as well as every insurance policy, and ask them to send you — on their letterhead — the name of the beneficiary as currently listed on the plan. Then make two copies, giving one to your estate-planning attorney and one to your financial adviser, and filing the original for yourself, along with your copy of your will or estate plan.

The beneficiary of your retirement plan should be a living person — not a trust and not your "estate." (There is an exception for a "see-through" trust). Beneficiaries who are "persons" can stretch out their withdrawals from an IRA, allowing the money to continue to grow on a tax-deferred basis. Since an estate does not have a life expectancy, you don't want to simply leave your retirement plan to your estate to be distributed, missing out on the chance to keep it growing.

The most obvious beneficiary choice is one's spouse. Only a spouse can do a "rollover" into his or her own name — stretching out withdrawals over his or her life expectancy. (Or a much younger spouse might do a "partial" rollover, so she can withdraw some IRA money without penalty if she needs the cash and is under age 59 and a half). Once inside a spousal IRA, the rules for withdrawal are based on the surviving spouse's age.

But if you don't have a spouse, naming other heirs to all or portions of your IRA can give them some of the same privileges. They don't get a "rollover IRA," but they do get an "inherited IRA." Upon receipt of the death certificate, the custodian will rename (and if necessary, divide, based on the beneficiary form) the IRA as an "inherited IRA" showing the decedent's name and date of death, and then the beneficiary's name.

You should instruct your potential beneficiaries NOT to take the money out of the IRA, thus incurring taxes on the withdrawal. Instead, they should leave it inside the inherited IRA, to grow for their own retirement.

And one more thing to consider: What if your beneficiary dies before you do? You should name a "contingent beneficiary" — another person to receive the money in case of the death of your beneficiary.

Many plan custodians aren't savvy about all the rules. So get advice from an expert.

To find an IRA expert to guide you through these decisions, go to IRAHelp.com, where you can search for one of Ed Slott's trained Elite IRA Experts, in your area.

An IRA is certainly one of the best opportunities to defer taxes and grow your money. If you're smart enough to take advantage of it, you should also make sure that your heirs get all the benefits they can. And that's The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange. She appears weekly on WMAQ-Channel 5's 4:30 p.m. newscast, and can be reached at www.terrysavage.com. She is the author of the new book, "The New Savage Number: How Much Money Do You Really Need to Retire?" To find out more about Terry Savage and read her past columns, visit the Creators Syndicate Web page at www.creators.com.

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