You’ve worked hard for your money, so the song goes. With that said, the last thing you want to do is give it away to the IRS in taxes.
How you manage the simple task of beneficiary designations on your IRAs can make a difference on how much of your hard-earned money your heirs get to keep.
You can help your heirs keep more of your money by doing some pre-work with your beneficiary designation documentation. Read on to learn more.
Avoid Inherited IRA Headaches
The First Step
- Make sure your heirs know about your IRAs.
- Make sure your heirs know what to do when they inherit your IRAs.
- The first step to helping your heirs avoid inherited IRA headaches is to organize your beneficiary designation documentation.
Always Designate A Beneficiary
If the custodian of your IRA does not show a beneficiary designation on your account, the custodian rules determine who your beneficiary will be, whether you wanted it or not. Beneficiary rules are very strict, so pre-work on your part can be crucial.
- Make sure you have chosen a beneficiary for all of your IRAs.
- Make sure you have submitted the proper beneficiary documentation to the custodian showing your beneficiary choices.
- Many times when an account is opened, folks put off deciding on their beneficiaries and then never revisit that decision.
- That omission can be costly for your heirs.
- The custodian rules could say that your estate has to become the beneficiary in the absence of your beneficiary designation….bad news for your heirs from a tax perspective.
You Need At Least 2 Beneficiaries
- It’s a good financial decision to always have at least 2 beneficiaries listed on your accounts; you can have more than 2, but you should have at least two.
- The 2 beneficiaries you should always have are, primary and secondary.
- Make sure you always list a primary and secondary beneficiary.
- If you and the primary die at the same time, you want your secondary to inherit your IRA, not someone who you didn’t choose.
- If you do not have a secondary beneficiary listed, and both you & the primary beneficiary die, custodian rules may apply.
If the custodian has outdated beneficiary documentation, your heirs may be in for a bit of a surprise. For example, after your divorce if you forgot to change the beneficiary designation on your IRA and your ex-spouse is still listed but you wanted your children to inherit your IRA, oh well.
- Make sure your beneficiary designation is current.
- Beneficiary changes usually occur with marriages, divorces, births and deaths….stay current.
- Be sure to contact the custodian of your IRAs with your beneficiary changes…stay current.
- Changing your beneficiary designation is as easy as submitting a change form to your custodian…stay current.
- By putting off the decision or the action, you harm, you do not help your heirs.
- Make sure your heirs can find your beneficiary documentation.
- Misplaced documentation can be harmful.
- Custodians don’t always have copies of beneficiary designations; or if they do it may not be the most up-to-date information.
- Don’t make your heirs rely upon the custodian for such valuable information.
- Keep a separate file marked Beneficiary Documentation.
- That file should just contain the beneficiary forms for your IRAs plus all of your financial accounts including 401k plans and Life Insurance policies.
- Make sure your executor and heirs know where this Beneficiary Documentation file is located.
Did you know that one form, the beneficiary designation form, could be so important? Most investors are not aware of the impact wrong beneficiary information or no beneficiary information can have.
Take the time to find your beneficiary documentation. If you cannot locate it, call your custodian for a copy to be sent to you. If the custodian doesn’t have a copy, ask them for a blank beneficiary form and submit that form.