As you sit down to the sometimes-daunting task of designating the heirs and beneficiaries to your estate, keep this in mind: No named beneficiaries can break the best of intentions.
That’s true for all the retirement accounts you might have, such as traditional and Roth IRAs, 401(k)s, 403(b)s, and 457s. When you open those accounts, all forms ask for beneficiary designations that you should carefully assign, so that your assets will transfer according your wishes.
Your Legacy Could Be at Stake
Not having beneficiaries in place could mean probate court—a process that’s often prolonged and pricey. Worse yet, the estate may be forced to pony up income tax on the funds straightaway, at what could be a gut-wrenching rate.
The beneficiary is typically a person or persons, such as a spouse, children, or grandchildren, who receive the assets from your accounts at the time of your death. Or they can go to a properly drafted trust, giving you more control over their distribution long after you’ve entered the sweet hereafter.
But remember this important footnote: Individuals named as beneficiaries will supersede heirs named in your will or trust. Those thoughtfully laid-out plans in your will be meaningless if they aren’t in accord with your named beneficiaries on your retirement accounts.
A Bit about Beneficiaries
Here are important pieces of information to keep in mind as you prepare to designate beneficiaries:
- Successive beneficiaries. If your spouse opts to leave it as an inherited account, he or she can take distributions as needed without penalty repercussions tied to age limits. Once the account becomes an inherited one, the spouse beneficiary can choose whomever they want as the successive beneficiary. But a note of caution: That means anyone, including a new spouse in a second marriage. It also means children from a previous marriage can be left out.
- Contingent beneficiaries. Even if you hand off everything to your spouse, contingent beneficiaries are a must-have. What if you and your spouse die at the same time? That’s right, everything ends up in that pesky probate court—a presumably unintended consequence that could easily have been avoided.
- Guardianship for minor beneficiaries. If you skip a generation to name your grandchildren or any other minor children as direct beneficiaries, someone has to take guardianship to manage the funds until those progenies are old enough to assume control. You need to create a trust or name who that might be.
- Going outside the family? Of course, you don’t have to leave your retirement accounts to family. You get to choose whomever you want. If the beneficiary is a trusted partner or friend, or even a child, for that matter, the inherited IRA has its own set of rules that they must follow.
- Up-to-date-forms. Remember to keep those forms updated. That can’t be said enough, as some people may say failure to do so is among the biggest mistakes that crop up with IRA beneficiaries. Life happens and a change, say the birth of a new child or the death of a named beneficiary, must be addressed in your beneficiary lineup.
- Get help. TD Ameritrade does not provide tax or legal advice. Please consult a qualified legal or tax professional who can help guide you down the best path for your circumstances.
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