Make Sure Your Retirement Plan Beneficiaries Are Designated and Updated

Published on March 11, 2024

You established and funded your retirement plan and have your investment strategy set. But did you remember to designate your beneficiaries?
Beneficiary designations are important since they are the people noted on your retirement account who will inherit it when you pass away. In short, those designations make sure your retirement plan goes to the people you want to inherit your nest egg.
If something in your family structure or circumstances has changed, it is equally important to check your plan paperwork to make the appropriate beneficiary updates as well.
  

Which plans should have designated beneficiaries?

In short, all retirement plans (IRAs, 401k plans, etc.), health savings accounts and education savings accounts, and bank accounts. If for any reason you are unable to make decisions for yourself regarding your finances or you are unable to complete the forms on your own, another legal document (and designation) to have on file is a power of attorney (POA). The POA must be executed at a time when both you as the principal and the person who will be your “attorney-in-fact” are competent and of sound mind, and, like a will or medical directive, must be notarized.
  

Reasons for noting retirement plan beneficiaries

• First, you want to make sure your wishes regarding the inheritance of your plan are met. The beneficiary designation supersedes stipulations in your will (so it’s also a good idea to review that legal document periodically as well). Without a designated beneficiary, your plan’s default provisions might be implemented, which might not align with your intentions about the distribution of your estate. You can choose primary and secondary beneficiaries (the latter serving as the contingent should the primary beneficiary pass away).
• Having designated beneficiaries helps your loved ones avoid probate and delays in settling your estate. When you designate beneficiaries, your retirement plan assets bypass the lengthy and potentially expensive legal process of probate, so your loved ones receive the funds without unnecessary complications.
• There may be certain tax advantages for your spouse or other heirs when they inherit your retirement account—so you want to make sure the right people inherit the retirement savings you worked hard to put away.

How to designate or update a retirement plan beneficiary

Look through your retirement plan documents for the beneficiary designation forms. Choose who you want to inherit your accounts—spouse, children, another family member, a friend, or charities (yes, you can leave a legacy by denoting a nonprofit charitable organization as the beneficiary).

Once you’ve established the beneficiaries, complete and submit the designation form to your retirement plan provider or administrator (in the case of a self-directed IRA, the administrator receives all these forms).

Periodically review and update the beneficiary designation form, especially after major life events. Things change, life happens … and your beneficiary designations may need to be revised.
  

Are you the beneficiary of an inherited IRA? If so, take note!

A long-time popular estate planning tool used to be the “stretch IRA,” which enables beneficiaries to use the IRA funds over the course of their lifetime. It was a way to pass on generational wealth while the assets grew tax deferred.

The SECURE Act of 2019 changed that by eliminating stretch IRAs for non-spouse heirs and making other changes.

Now, for IRAs inherited after December 31, 2019, non-spouse heirs have 10 years after the death of the original account owner in which to spend down the IRA’s assets. Alternately, non-spouse beneficiaries can also transfer the inherited IRA into a new IRA based on satisfying certain requirements. Failing to follow the rules may result in the IRA being treated as a taxable distribution; therefore, beneficiaries are well-advised to consult a financial planner or other trusted adviser about this matter.

Spouses who inherit an IRA are excluded from this provision and have two options.

• Start taking required minimum distributions from the inherited IRA by the end of the year after the owner’s death or the year in which the owner would have reached the age for RMDs, which as of 2023 is 73 years old.
• Roll over the inherited IRA into a traditional IRA they already own, and treat the assets as their own.

Other excluded beneficiaries from the 10-year rule are minor children, disabled or chronically ill individuals, or individuals who are less than 10 years younger or older than the original account holder (such as a sibling, cousin, or friend).

If you’ve opened a self-directed IRA with Next Generation Trust Company, our team can walk you through this important step if you need assistance. We make sure all your plan paperwork is in order so you can start growing your retirement savings through investments in alternate assets without undue delay. Contact us at NewAccounts@NextGenerationTrust.com or 888.857.8058 if you’re setting up a new account and need some guidance.