Most savers don’t think twice about the beneficiaries they name for their retirement accounts. Retirement proceeds are, more often than not, left outright to a spouse and then to any children divided equally. Once in the hands of the beneficiary recipient, there are options on what may be best.

The first thought is to make sure that your loved one has a beneficiary election. Not having a proper designated beneficiary can cause the IRA to be paid out to the estate. Doing this would subject the proceeds to income taxation much sooner than otherwise necessary.

There are different rules for spouse beneficiaries and nonspouse beneficiaries. Spouse beneficiaries can choose to roll the savings into an IRA of their own. From there they can name their own beneficiaries, take distributions based on their own life expectancy, convert to a Roth IRA or do anything that you could do if you were the original account owner.

Nonspouse beneficiaries have three options. The least desirable of these options is to cash out. This will cause the entire amount to be taxed as ordinary income in the year that you take it.

A possible better option may be, from an income tax perspective, is to stretch that IRA over your life expectancy. These distributions must begin by Dec. 31 of the year following the date of death. If you miss that cutoff date, you are limited to option three.

Option three is to spread the proceeds over a maximum of five years. This beats immediate income taxation, but this may not be nearly as good as a lifetime stretch out.

If the decedent was over age 70½, it matters whether or not they received their required minimum distribution before passing away.

If they did, then you are OK just waiting until the following year to take your inherited distribution.

But if they have not, then the executor of the estate is responsible to make sure that the deceased IRA owner has a distribution before Dec. 31 of the year of death. Missing that distribution could cause a penalty of 50 percent of the amount that should have been withdrawn. For this reason alone, elder owners of retirement accounts should consider taking their distributions early in the year to avoid this possible problem.

If you are a regular reader of this column, you already know that I am a big fan of utilizing trusts for many estate planning solutions. The rules here are a little trickier than they would be for non-retirement assets.

Have an attorney familiar with IRA planning, income tax planning and estate planning draft your trust. Having a trust that doesn’t properly qualify could force your distributions to be taken out and taxed over the five year period.

Review your beneficiary elections to be sure that you aren’t passing along unintended tax consequences. And if you are a beneficiary, there is no time like the present to determine your strategy.

John P. Napolitano CFP, CPA is CEO of U.S. Wealth Management in Braintree, Mass.  Visit JohnPNapolitano on LinkedIn or The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. John Napolitano is a registered principal with and securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through US Financial Advisors, a Registered Investment Advisor. US Financial Advisors and US Wealth Management are separate entities from LPL Financial. He can be reached at 781-849-9200.