Why can’t I just name beneficiaries in my will?
While it’s a good idea to have a will as part of your estate plan, you still will want to make beneficiary designations for each IRA you own. Here’s why:
- If no beneficiary is named on the retirement account, many plan agreements will pay out to either the estate or a spouse as the default beneficiary.
- If the estate ends up being the beneficiary, the retirement assets will generally be combined with your overall estate and must be distributed from the retirement account within five years or over life expectancy, depending on the age of the account holder. In addition, these assets would end up going through probate court as a part of your estate.
- Not only does this create more hurdles and paperwork for your loved ones, but the additional costs incurred could also reduce the amount of assets available to pass on to them.
By naming a beneficiary, that person may be able to continue the tax advantages associated with the account. For example, a traditional IRA that a spouse inherits could continue growing on a tax-deferred basis. Just keep in mind that your beneficiary may be required to take a required minimum distribution (RMD) from certain tax-deferred accounts. To learn more about non-spouse beneficiary distributions, please refer to “Taking required minimum distributions.”
How do I get started?
First, check all your retirement accounts—IRAs, 401(k)s, 403(b)s—to see if you have named a beneficiary. If you have, make sure it’s still the beneficiary you want to receive your assets. If you haven’t named a beneficiary—or don’t remember if you did—check with the plan administrator or go to the company website to find out how to get one designated.
After that, we recommend reviewing your beneficiaries once a year to make sure everything is still in line with your wishes. And be sure to speak with your legal and tax advisor for more information about beneficiary planning and how it fits into your overall estate plan.