The Differences Between Primary and Beneficiary in an IRA
If you're researching individual retirement accounts for the first time, you’re sure to encounter some words you're unfamiliar with. Early on, however, it will be useful to know the difference between a primary and secondary beneficiary, because the application likely will ask you to choose them when you're setting up your IRA account.
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IRA
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An IRA is a savings option for people interested in putting money to the side for retirement. The two main types of IRAs are the traditional and Roth IRA. The traditional IRA allows you to place pretax earnings into a savings account and allow them to grow tax free until you withdraw the funds. The Roth IRA, on the other hand, allows you to contribute money that has already been taxed to the IRA. With the Roth, the money also grows tax free, however, you don't have to pay taxes on the funds upon withdrawal.
Beneficiary
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The beneficiary of an IRA is the person who receives ownership of your IRA when you die. A primary beneficiary is a type of beneficiary. The two types of beneficiaries are primary and secondary beneficiaries. The primary beneficiary is the first person in line to receive your IRA following your death. The secondary beneficiary is the person who takes your IRA if, for some reason, your primary beneficiary cannot take it. If, for example, the person you name as primary beneficiary dies before you, the secondary beneficiary will take your IRA instead.
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Will
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If you name beneficiaries for your IRA, then that designation overrides your will. Typically, if you have a will, your will establishes how your estate is disbursed. Your estate includes everything you own, including your retirement accounts. However, certain arrangements aren't subject to instructions in your will. For instance, if you have a savings account and specify it’s payable on death to your son, then it will go to your son in spite of who you specified in your will. The same is true for IRAs. If you name a beneficiary, that will override any instructions you placed in your will concerning your IRA.
Marriage
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If you're married, the law requires you to name your spouse as your primary beneficiary. If your spouse has an IRA of his own, he may roll your IRA into his IRA upon your death. This can help to avoid, or at least delay, having to pay taxes on those funds. Your spouse may waive his right to be your primary beneficiary; however, he must do so in writing.
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References
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