Beneficiary Designations

When’s the last time you checked your IRA’s beneficiary designation?

If you’re like most people, it’s been a while. Many people name a beneficiary when they open a retirement account. Most NEVER revisit their choices. Due to the SECURE ACT the beneficiary designation of your retirement accounts are more important than ever.

But not reviewing your beneficiary designations on a regular basis is a huge mistake. And it’s not just about you. Outdated designations may cost your loved ones a lot of time, money, and frustration.

Why?

Because life changes! And when it does, updating your beneficiary designation may make sense, too. (Plot twist: the best choice isn’t always the obvious one.) 

So, let’s talk about five things to consider when designating your beneficiary.

1. One form to rule them all

Believe it or not, your beneficiary designation form overrides your will. If you think naming an IRA beneficiary in your will is enough — think again! 

A missing beneficiary designation form means your IRA assets will be paid to your estate upon your death. This leads to the dreaded probate process … which can be lengthy, frustrating, and expensive for your heirs. Do you really want them to deal with an extra headache at an already-difficult time? I would guess not. So, take the time to complete your beneficiary designation form. 

2) Ch-ch-ch-changes 

Review and update your beneficiary designation whenever a major life change happens. Death of a beneficiary, divorce (yours or theirs), and other life events may prompt you to rethink your original choices. 

Example: let’s say you divorce and later remarry. If you don’t update your beneficiary designation, your ex may receive part (or all) of your IRA assets. Awkward! 

3) Happy spouse … happy house

In some states, IRA owners need written permission from their other halves to name a non-spouse beneficiary. In most cases, it’s usually wise to name your spouse as beneficiary — and not just to keep the peace at home.

As your primary beneficiary, your spouse may take ownership of your IRA with the same rights you had. If you name a non-spouse, they may have to withdraw the assets within a certain timeframe. This means less tax-deferred earnings growth and possible unwanted tax consequences for them.

4) Won’t someone think of the children?!?

Naming your children as primary beneficiaries may make sense if your spouse is financially secure. But note that children must take distributions from the IRA right away after inheriting it, and under the new SECURE ACT must be distributed over 10 years. This can affect their taxes. 

Or, name your spouse as primary beneficiary and your children as contingent beneficiaries. This option gives more flexibility with taxes and timing of distributions.

5) A fine line between trust and control

Worried about the fiscal (ir)responsibility of your heirs? You may want to name a trust as your IRA beneficiary.

The downside is greater tax liability for you. Trusts can also be complex, so it’s best to consult an attorney on setting one up. 

There’s no single best answer for how to choose your IRA beneficiary. You need to consider your goals and unique circumstances. The team at Independence Wealth can help you make this important choice. Give us a call today.