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How to protect your IRA

Most folks who save for their retirement are familiar with an individual retirement account, or IRA. But a lot of people who have an IRA make mistakes that can cost them or their heirs money in additional and unnecessary taxes.

Here are five things you can do to ensure that your IRA works the way you want it to:

Designate a person as beneficiary. Failure to name a person as a beneficiary means the IRA assets pass through your estate and that'll cost your heirs. That's because if you hadn't already started taking distributions by the time of your death, the IRA assets must be distributed to your estate's heirs within five years of death. Or if you had started, distributions must be paid out to the heirs over what would have been your remaining life expectancy. If instead you name a person, or multiple people as the beneficiaries of your IRA, they are permitted to "stretch out" the tax-deferred assets over their own lives and this can reduce the taxes paid each year.

Name a back-up beneficiary. Naming a back-up or contingent beneficiary allows the primary beneficiary the option to "disclaim" or reject the IRA if he doesn't want or need the money. This may be especially worth doing when the primary beneficiary who disclaims the IRA is a lot older and the contingent beneficiary, who is younger, can then stretch out taking IRA distributions over a longer lifetime.

Don't always name your spouse as beneficiary. Designating your spouse as the beneficiary of your IRA isn't always the best choice. In the case of a second marriage, where there are children from your first marriage, designating a trust might be the best choice. This can allow the spouse to use the IRA for retirement income while ensuring the children are the ultimate beneficiaries. Designating a trust as the beneficiary of an IRA can be a complicated decision requiring professional legal guidance.

Keep beneficiary designations up to date. Remember to revise, update or change the beneficiary designations for your IRA in the event of a marriage, divorce, birth of a child, death of a beneficiary or similar circumstances.

Get up to speed on distributions. Finally, keep in mind that as you near age 70, you'll need to get up to speed as to when you have to commence minimum required distributions, or MRDs. Regardless of whether you are still working, you must begin taking minimum required distributions (MRDs) each year from your traditional IRAs. MRDs must begin no later than April 1 following the year you turn 70 1/2. If you don't withdraw enough or you don't withdraw it on time, the IRS can penalize you 50 percent of the difference between the amount you took out and the amount you should have taken out. Roth IRAs are not subject to these distribution requirements.

But don't delay and wait until the April 1 deadline to take out the first minimum withdrawal. If you do, you'll also have to make another withdrawal by December 31 of the same year. Two minimum withdrawals in the same year could bump you into a higher tax bracket and increase your tax liability.

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