Naming your IRA beneficiary requires serious consideration. Completing the IRA beneficiary designation form is part of your overall estate planning. Because the outcomes vary depending on your choice, you should understand the options.
For many, naming your spouse as beneficiary is the logical choice. It provides some good tax and estate planning too. For example, a spouse can rollover an inherited IRA into his or her own IRA. In some cases, a spouse beneficiary might be able to delay required minimum distributions (RMDs).
There isn’t a federal requirement that you name your spouse as beneficiary, but some company plans, and community property states may have this requirement.
Other Family Members
Another common choice is to name younger family members directly on the beneficiary designation form. This lets them take advantage of the RMD stretch after your death. Naming your siblings directly on the form allows them to also take advantage of the RMD stretch.
Your Friend or Neighbor
You can name anyone you want as your beneficiary. They don’t have to be a blood relative. Friends, neighbors, or long-time partners who just never married are commonly named. And, if you specifically name them on the beneficiary designation form, they might qualify for the stretch.
Some people with larger IRA’s want a little control over the money after their death. If you’re in this situation, you may want to consider a trust. Trusts can be very useful when young children and/or someone with special needs are involved. When properly drafted by an attorney, it may still be possible to stretch RMDs. Just remember that trusts are complicated and can be expensive. If you don’t have a strong reason for naming a trust, this may not be the best option for you.
Most traditional IRAs are taxable, and charities don’t have to pay taxes. If taxes are an important consideration for you, or you have more than one traditional IRA, this may be a good choice.
Because an estate isn’t considered a designated beneficiary under RMD rules, this is usually a poor choice. Naming your estate as beneficiary on the form means you lose the maximum RMD stretch.
Many IRA documents list the estate as the default beneficiary. Failing to name a beneficiary means your estate is the default beneficiary. Having only one named beneficiary who predecease you means your estate is the default beneficiary.
Update Beneficiary Designations
We all know life happens and situations change. Unfortunately, errors can result in an accidental beneficiary, a higher tax bill, and significantly reduced assets passing to those you intend to inherit. That’s why it’s a good idea to review your beneficiary designations regularly and make any adjustments as needed.