Opening a new retirement account is a big step in the journey of planning for retirement. Among the many decisions to consider, one can have an outsized impact on the assets you accumulate. Who to name as a beneficiary for your retirement assets when you die.
Who should be a beneficiary?
Are you married? Most IRA owners list their spouse as the primary beneficiary. Doing so carries the added benefit of allowing taxes to extend over the lifetime of your spouse. The distribution and associated tax payment window will be shorter for any other beneficiary.
Does your spouse need the money? Keep your spouse as the primary beneficiary and add children as contingent beneficiaries. If your spouse has adequate financial resources when you die, he can disclaim the IRA in writing, and the IRA goes to the kids. If the children inherit IRA assets as minors, they will need to set up a beneficiary IRA with a custodian over 18 that acts as a trustee.
Do you plan to keep the money in the family? If you have reasons to leave your IRA assets to beneficiaries outside the family, or if you have no family to bequeath it to, designate your charities of choice.
Do you want more control over the distribution? The best way to avoid problems from the money ending up in the wrong hands is to have a trust inherit the IRA. One problem with this approach is it causes the taxes to be paid sooner on the IRA account. But when distribution considerations override taxes, it can be a way to protect the funds.
Listing no beneficiaries:
Some account-holders don’t set up any beneficiaries, which can cause problems later. Without specific instructions, each financial institution has a default beneficiary sequence. Fidelity, for example, will distribute funds first to a spouse. If you have no spouse, the distribution goes to your estate. Other financial institutions may have different defaults. If you prefer the IRA to be inherited by a child, grandchild, niece, or nephew, these default options may not offer the result you want.
Imagine you set up an IRA years ago, establishing your spouse as the primary beneficiary. You had no children then, so you named your sister as a contingent beneficiary. She was a single mom to two children and had a hard time making ends meet. As long as your family was covered, you wanted to help her out if you could. Fast-forward twenty years. You are now divorced and raising your two kids, aged 12 and 15. After starting a successful catering business, your sister is comfortable and no longer needs financial assistance.
The problem? If you die tonight, beneficiary designations override your Will. Since you haven’t reviewed your beneficiaries for the last two decades, your ex-spouse remains the primary beneficiary. As of 2017, 29 states’ statutes nullify a now-deceased account-holders designation of a spousal beneficiary if the account holder and beneficiary have divorced. Meaning 21 states still let those funds go to your ex-spouse who may, or may not, spend the funds on the kids. If the spouse isn’t alive, the money goes to your sister, who no longer needs your help. The parties who you want to receive your assets, the kids, won’t receive a dime.
To minimize and avoid problems that may upend your estate planning intentions, review your retirement account beneficiaries. If you haven’t reviewed your beneficiaries for more than a year, do it now to ensure they reflect the plan you have for your assets.