Failing to properly designate beneficiaries for your IRA is a big mistake, perhaps the biggest mistake you could make with their IRAs.
- Do not leave the beneficiary designation blank and send your IRA through your will. I cannot stress this enough. An IRA left to the owner’s will is 100% taxable in the year of death. This could cost your heirs nearly half of the value of the account. The half they lose will go to federal and state income taxes.
- Do not designate “My Estate” or “Estate of…..” The result is the money goes through your will. See #1.
- Do not assume you know how you have designated your beneficiary. Check it out with the custodian holding the assets. This is true of your employer retirement plans and especially the plans remaining with a former employer. Too many times people fail to update beneficiary designations following a marriage, divorce, death, birth, or any other life change. Imagine the problems if your wife finds out too late that you never changed the beneficiary designation from your mother to her after marriage. Or perhaps worse, imagine if your new wife learns too late that your first wife is still the beneficiary of your IRA or 401k. Think this doesn’t happen? Think again! Don’t let this happen to your family. Take a few minutes to confirm your beneficiary designation, and your family will thank you.
- Do name a Contingent beneficiary in addition to a Primary. You can name more than one person to be primary and then you indicate in what percent you want the assets shared. But you should also name contingent beneficiary(ies) in the event that no primary beneficiary is living. There are very favorable tax rules for heirs when they are designated as beneficiaries by name with the IRA or 401k custodian. This tax benefit is sometimes called stretching your IRA or a Stretch IRA. See our report: Stretch Your IRA.
- Be very cautious about naming your trust as the beneficiary of your IRA. See our report: Know the Dangers of Linking Your Trust and your IRA.
- Do not combine charitable beneficiaries with persons in the same IRA. There are advantages to naming a charity as your beneficiary, but be sure to split your IRAs into different account numbers so you have one account just for charitable beneficiaries.
If you want to discuss how to properly name beneficiaries on your retirement plan, call and talk with one of our trained IRA specialists.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us. We are here to help and welcome your call.