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September 3, 2021

Five Tips for Designating Beneficiaries for Your Retirement Accounts
Alli Thomas

When’s the last time you checked your who you have designated as the beneficiary on retirement plan(s) and accounts?

If, it’s been a while – many people name a beneficiary when they open a retirement account and never revisit their choices again – you should go and look. Especially if your life situation has changed since then.

Not reviewing your beneficiary designations on a regular basis is a big mistake. And it’s not just about you. Outdated designations may cause your loved ones a lot of time, money, and frustration.

Here are five tips for reviewing beneficiary designations:

1. Your beneficiary designation form overrides your will.

If you think naming a beneficiary in your will is enough, think again! A missing beneficiary designation form means your retirement plan assets will be paid to your estate upon your death. This leads to the dreaded probate process, which can be lengthy, frustrating, and expensive for your heirs.

2. Review and update your beneficiary designation whenever a major life change happens.

Death of a beneficiary, divorce (yours or theirs), and other life events may prompt you to rethink your original choices.

Example: let’s say you divorce and later remarry. If you don’t update your beneficiary designation, your ex may receive part (or all) of your retirement assets. Awkward!

3. In some states, IRA owners need written permission from their other halves to name a non-spouse beneficiary.

In most cases, it’s usually wiser to name your spouse as beneficiary — and not just to keep the peace at home.
As your primary beneficiary, your spouse may take ownership of your IRA with the same rights you had. If you name a non-spouse, they may have to withdraw the assets within a certain timeframe. This means less tax-deferred earnings growth and possible unwanted tax consequences for them.

4. Naming your children as primary beneficiaries may make sense if your spouse is (or will be) financially secure when you die.

But note that children must take a distribution from the IRA right away after inheriting it. This can affect their taxes. One solution is to name your spouse as primary beneficiary and your children as contingent beneficiaries. This option gives more flexibility with taxes and timing of distributions.

5. If you’re worried about the fiscal (ir)responsibility of your heirs, think about naming a trust as your beneficiary.

The biggest downside of doing this is greater tax liability for you. Trusts can also be complex, so it’s best to consult an advisor on setting one up.

There’s no single best answer for how to choose your retirement plan beneficiary. If you’re struggling with this decision, one of our financial advisors can help walk you through making this important choice. Click here to request a complimentary, no-obligation conversation today.

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