When was the last time you checked to see who was listed as the beneficiary of your individual retirement account (IRA) or retirement plan? Many of us name beneficiaries when establishing an account, but we often forget to review them. Furthermore, a common misconception is that an individual’s will determines retirement account beneficiaries. In reality, beneficiary designations may supersede the instructions of your will. For this reason, it is imperative to make sure you have beneficiary designations for each retirement plan you hold.
Life events, such as marriage, divorce, death, or the birth of a child are the perfect time to review and update your beneficiaries. Some experts even recommend yearly beneficiary reviews in the event that a charity or trust you have designated may no longer exist. In addition, if your employer-sponsored plan changed providers, it’s possible that your beneficiary designation did not carry over to the new provider. A best practice is to make sure the designations are in place and documented.
CHOOSING A BENEFICIARY
Selecting an appropriate beneficiary can impact how your retirement assets will be paid out and the tax consequences to your inheritors. The custodian of these account types will generally let you select both primary beneficiaries and contingent beneficiaries. A contingent beneficiary is an individual or entity that will inherit the assets if the primary beneficiary predeceases the account owner.Beneficiaries can be individuals, such as:
Or an entity, such as:
- A spouse
- A non-spouse (child, grandchild, sibling, other family member, friend, etc.)
- A trust
- A charity
- An estate
A spouse is the only beneficiary that can roll inherited retirement assets into his or her own IRA or retirement plan account. All other beneficiary types must typically establish inherited IRAs or retirement plan accounts. The significant difference here is that spouses can then delay required minimum distributions (RMDs) until they reach age 73. RMDs are typically based on the beneficiary’s life expectancy, so the younger the beneficiary, the longer he or she can keep the assets in a tax-deferred IRA or plan.
If a non-spouse inherits a 401(k) or other qualified retirement plan, it is best practice to determine the options available per the plan document. The non-spouse beneficiary may be able to:
- Roll it over to an inherited IRA
- Take a lump-sum distribution
- Remain in the plan for a period of no longer than ten years.
If the person you inherited the account from was over age 73, and thus had already started taking RMDs at the time of death, the beneficiary must satisfy the current year RMD if not already taken. Once that RMD is satisfied, the ten-year rule generally takes effect.
WHAT YOU SHOULD DO TODAY!
To make sure your assets pass to your beneficiaries the way you intend:
- Periodically review your beneficiary designations for all your investment accounts, especially after major life events.
- Don’t forget about your checking and savings accounts.
- If all your files are electronic, make sure to keep a hard copy.
- Educate your beneficiaries on the options they have and the tax implications of each.
- If you have concerns about how one or more of your beneficiaries will manage the assets they inherit, you may want to consider naming a trust.
It is vital to keep beneficiary designations up to date and to make sure that the assets you have worked so hard to accumulate are passed along according to your wishes. Speak to your Stifel Financial Advisor today to review your beneficiary designations.
* Exceptions include spouses, minor children, disabled or chronically ill individuals, and non-spouse beneficiaries who are no more than ten years younger than the deceased. Once a minor child reaches the age of majority, the ten-year rule begins. If a non-spouse beneficiary inherited an account prior to 2020, the inherited IRA is considered grandfathered under pre-SECURE Act rules and therefore may continue to take RMDs over the beneficiary’s life expectancy.
This information is for educational purposes only. Stifel does not provide legal or tax advice. You should consult with your legal and tax advisors regarding your particular situation.