Individual Retirement Accounts (IRAs) are a key part in estate planning. Upon your passing, your IRA(s) will be distributed according to the beneficiary designations, even if your will and/or trust(s) instruct assets to be transferred differently. You identify your primary and contingent beneficiaries upon opening your IRA — but how often do you review them?

Making Sure Your Assets Are Distributed According To Your Wishes

A common misconception is that IRA beneficiaries are covered under a will or trust. An example of a common mistake is to instruct the trust to be distributed to all children equally and list the executor as the primary beneficiary of the IRA with the intention that they will then distribute assets equally amongst the children. This complicates asset distributions for the executor and there is no guarantee that the IRA assets will properly be transferred to the children.

In addition to listing primary beneficiaries, it is important to name contingent beneficiaries in case the primary beneficiary predeceases the IRA owner or if the primary beneficiary wishes to disclaim his or her interest after death.

Make Sure Beneficiary Stretch IRA to Reduce Taxes

When a beneficiary inherits an IRA, they are able to take required minimum distributions (RMDs) out over their lifetime. This is referred to as a stretch IRA. The RMDs are taxable and it is generally advantageous for the beneficiary to stretch them out over their lifetime rather than taking a lump sum taxable distribution from the IRA. This stretch feature is lost when no beneficiary is designated.

Per Stirpes vs Pro Rata

When designating an IRA beneficiary, you may select the option “per stirpes.” This means that if one of your beneficiaries predeceases you, their share of your IRA is equally distributed to their children. For example, if your two children are 50% primary beneficiaries on your IRA and one predeceases you, their share will go to your grandchildren. By selecting “pro rata” instead of per stirpes, their share will be allocated to the living beneficiary.

The retirement accounts that you worked so hard to build up should be distributed according to your wishes at your passing. The only way to ensure this is to designate primary and contingent beneficiaries and to update those beneficiaries as life events occur. At Schultz Financial Group, we assist clients in reviewing IRA beneficiary designations every other year and when life events, such as births, deaths, weddings, and divorces, occur. Feel free to reach out to us if you have questions about your beneficiary designations.

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