Top 10 Must-Dos for IRAs
It’s vitally important to make sure that the proper beneficiaries are designated for your IRAs and other retirement accounts, since the beneficiary designation controls what happens to the account, regardless of what your will, trust, divorce settlement, or any other agreement says.
The following is based on IRA expert Ed Slott’s “IRA New Year’s Resolutions:”
1. Obtain a copy of the beneficiary form for each IRA you own.
2. Make sure you have named a primary beneficiary and a secondary (contingent) beneficiary for each IRA you own. Secondary beneficiaries are less important for IRAs payable to trusts.
3. If there are multiple beneficiaries on one IRA, make sure that each beneficiary’s share is clearly identified with a fraction, percentage or the word “equally,” if applicable.
4. Make sure that the financial institution holding the IRA has your beneficiary designations on file and that their records agree with yours.
5. Keep a copy of all your IRA beneficiary forms and give copies to your financial advisor, attorney, and CPA.
6. Let your beneficiaries know where to locate your IRA beneficiary forms.
7. Review your IRA beneficiary forms at least once a year to make sure they are correct and reflect any changes during the year due to new tax laws or major life events such as death, birth, adoption, marriage, divorce, etc.
8. Check the IRA custodial document for every financial institution that holds an IRA account for me. Make sure that the document allows the provisions that are important to you and your beneficiaries. All IRAs are not created equal!
9. Do not name your estate as beneficiary.
10. Consider a Standalone IRA Trust to obtain maximum stretch-out and protection of your IRAs for younger beneficiaries.
Why shouldn't you name your estate as beneficiary of an IRA? What is the difference between naming an estate as beneficiary versus naming the executor of your will? I want to leave my estate to my children with provisions to leave a certain percentage of the funds at different points in time (based on their age/maturity) - so who should be beneficiary to carry out this plan of phased payments to my kids?
Linda - if your estate is the beneficiary of your IRA, IRS rules will require the IRA to be fully paid out much more quickly than if individuals or a qualified trust were beneficiaries. This will result in loss of the valuable tax-deferred growth that can make IRAs such a powerful investment vehicle. I recommend that you speak with a CPA or tax attorney to decide on your best course of action. It might be that a standalone IRA trust makes sense.