Beneficiaries: An Important Part of Your Retirement Account

by | Aug 18, 2017 | Financial Planning

Who are the beneficiaries on your IRA or retirement account at work?  If you cannot answer immediately, you may want to check.

Often, employees will name a beneficiary on a retirement account at work when they enroll in the plan.  Which may have been twenty years ago.  Or you may have named beneficiaries when you opened your IRA fourteen years ago.  Have you checked lately?  We have discussed the importance of naming a beneficiary many times on our site.  You can find us mentioning beneficiaries here, here and here.

We have been discovering IRA accounts with “Estate” listed as beneficiaries on the retirement account.  Understand you have the right to name (and change) beneficiaries on your retirement account at work and on your IRA’s.  If you move your IRA to a new bank or broker, this is a good time to update the beneficiaries for this account. In any event, it’s a good idea to check this information.

Why is leaving your IRA to someone (and not your estate) important?

Leaving your IRA directly to someone is important – mainly because you CAN name beneficiaries!  Many assets simply flow directly into your estate after you pass away. But with an IRA you have the ability to name a beneficiary. This asset (accounts) with designated beneficiaries will not flow into your estate, they can go directly to whomever you name as your beneficiary.  This can have some tax-saving (and compounding) benefits.  This takes even more importance, as distributions from the IRA can be stretched out over longer periods of time. “Stretch IRA’s” are still available, and can greatly extend the amount of time taxes can be deferred. But keep in mind, “stretch IRA’s” are on the chopping block and may be eliminated or severely curtailed by Congress.

Did you open your IRA years ago? Have you not checked (or updated) your beneficiary information recently?  Often times (before clients are married), young investors will name parents or siblings as beneficiaries.  Or the beneficiaries you named long ago may have already passed away.  Or you may simply want to designate the money go to someone else. It’s OK, it’s your money. You can change the beneficiaries on your account as often as you like.beneficiaries

Also keep in mind the beneficiary you designated on your retirement plan at work will NOT carry over when you roll that account into a 401(k) with a new employer’s plan. And a beneficiary listed on your 401k at work won’t carry over to an IRA, or when you convert a regular IRA to a Roth IRA.

You are certainly permitted to name more than one beneficiary on your IRA. And you may also name “Contingent beneficiaries” in the event the original beneficiary passes away first. And then there is the phrase on the beneficiary form in Latin…”per stirpes.” What does that mean?

Per Stirpes” is a latin phrase meaning “per branch.”  What this means is if one of the original beneficiaries passes away (before the form is updated), it means that person’s share would flow through to their heirs. It’s a good tool, if that is what you had in mind.  Let me share an example:

Suppose you name four beneficiaries to each receive 25% of your retirement account upon your passing. And further suppose one of the four passes away before you. If you do not indicate “per stirpes” the account would simply be split three ways to the three remaining beneficiaries. If that is what you intended, fine.  “Per Stirpes” is a good tool which can allow you to pass money along to the next generation in your extended family.

Nobody likes the idea of more paperwork.  But over time, people get married, divorced, families grow (and shrink).  You may decide to leave some funds to a charity.  And we all know “things happen.”  It’s a good idea to periodically review the beneficiaries designated on your retirement assets.

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