You’ve worked so hard to build up your IRA—carefully planning and saving so that you’ll have a more comfortable retirement. But what happens to those assets if you die before you use them all? How can you be sure they’ll go where you want them to? That’s where naming beneficiaries comes in.

Let’s start with a definition. A beneficiary is a person or entity you choose to receive anything that’s left in your retirement account when you pass away. By naming a beneficiary (or beneficiaries) today, you make sure the funds go to whom you want and that the person who receives them could also receive some of the tax benefits that you’ve enjoyed on the account.

What types of beneficiary designations are there?

You have many options and factors to consider when making decisions about setting up your IRA beneficiaries. Since each person’s situation and desires are unique, most accounts are flexible enough to work with any specific requirements you might have.

Here are the key types of beneficiary designations to consider:

• A primary beneficiary can be a person, a charitable organization, a trust or an estate. If the person is a minor, you’ll want to designate a custodian for that minor. 

A single primary beneficiary will receive 100% of the assets. For more than one primary beneficiary, you can choose any mix of allocation percentages as long as the total equals 100%.

• Contingent beneficiaries can be added to an account to receive your assets if all your primary beneficiaries are deceased. The rules mentioned above regarding types and percentages for primary beneficiaries also apply for contingent beneficiaries.

• The “per stirpes” designation can be added to any individual named as a beneficiary. This designation allows the descendants of that beneficiary to receive that person’s share if he or she dies before you do. In other words, the children of a deceased beneficiary (related by blood or legal adoption) receive equal shares of that beneficiary’s allotment.

Example: Bob has an IRA and two adult children, John and Jane. Bob has designated his children as equal beneficiaries per stirpes.

Bob passes away, and so has Jane. Jane had three children. Bob’s IRA is split 50/50 between his children. However, because Jane is already deceased, her 50% is then divided equally between her three children. 

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. In addition, these assets would end up going through probate court as a part of your estate and would be subject to estate taxes. 
  

• Not only does this create more hurdles and paperwork for your loved ones, but it can also reduce the amount of assets available to pass on to them.

So, 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 at age 73, they may be required to take a minimum distribution 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 of all, 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.