Dos and Dont's When Naming an IRA Beneficiary

Nov 15, 2017

MoneyLife100Individual retirement accounts (IRAs) hold more than one-fourth of all retirement plan assets in the United States, according to the Employee Benefit Research Institute. CPAs recommend beginning retirement planning as early as possible, and contributing regularly each year to secure a financially sound future. Unfortunately, simple mistakes prevent many retirees or their families from getting the most benefit from their IRAs. The Pennsylvania Institute of Certified Public Accountants (PICPA) highlights smart steps to take and errors to avoid.

Do Name a Beneficiary

There are many good reasons to choose a beneficiary. Among them, it offers your loved ones proof of your intentions if you die, which means they should be able to avoid the delays and costs associated with probate if your estate is the IRA beneficiary. Make your choice official on a form that you give to your IRA custodian, and retain an easily accessible copy for yourself or your heirs.

Don’t Pick Your Estate

As alluded to above, it’s generally a bad idea to name your estate as beneficiary. The IRA may be subject to creditors’ claims if it’s considered part of your estate. If you name a beneficiary, they are allowed to stretch required IRA distributions over their life expectancy, but that option does not apply to your estate.

Do Update Your Beneficiary

It’s important to make adjustments to your beneficiary after major life events. If you divorce, for example, and no longer plan to leave your IRA to your former spouse, make sure you replace him or her with a new beneficiary. If you marry or have children, be sure to make updates for a name change or to add new family members as beneficiaries as appropriate. Updating the beneficiaries in your will is not good enough if an outdated IRA beneficiary form still names the wrong people.

Do Consider the Tax Impact

As a general rule, your heirs should not immediately liquidate a newly inherited IRA. It’s typically better taxwise to take only the required minimum distributions. Additionally, a spouse who inherits an IRA has the choice of rolling the funds over from the inherited IRA to their own IRA. Again, individual beneficiaries will want to consider the “stretch” IRA, which allows them to take required minimum distributions over their own lifetime, potentially minimizing tax impacts.

Don’t Forget to Set Controls

What would happen if your child inherited a significant amount of money from your IRA while he or she was still in high school? Could you be sure that he or she would make good choices that would benefit their short- and long-term financial security? It’s tough to say how any young person would handle a windfall, which is why you should select a guardian or trustee when naming a minor child as beneficiary. Among other benefits, it will ensure that an adult is there to guide your child’s decisions and prevent him or her from making unwise choices. In addition, if you are divorced and don’t want your ex-spouse determining how the IRA legacy is spent, naming an alternative guardian or trustee puts the responsibility in someone else’s hands.

Do Contact Your Local CPA

Need help with retirement, estate planning, or any other financial issue? Your local CPA can help. Turn to him or her with all your financial questions. To find a CPA in your area or for more financial tips, visit www.picpa.org/moneyandlife.
About PICPA

The Pennsylvania Institute of Certified Public Accountants (PICPA) is a premiere statewide association of more than 22,000 members working in public accounting, industry, government, and education. Founded in 1897, the PICPA is the second-oldest and fourth-largest state CPA organization in the United States.

Money & Life Tips are a joint effort of the AICPA and the Pennsylvania Institute of Certified Public Accountants (PICPA), as part of the profession’s nationwide 360 Degrees of Financial Literacy program.


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