According to a December 2023 article in the New York Times, there is over $35 trillion in retirement accounts in the U.S. and about $16 trillion of that will be transferred in the next decade. There’s no doubt about it: the “Great Wealth Transfer” is upon us and it is more important than ever that we protect our retirement assets and safeguard they will go to the right heirs. Even the slightest mishap in planning can cause the wrong people to inherit your assets at worst or saddle the right ones with extraordinary taxes at best. Please follow along as we detail best practices.
It’s easy to do, but often savers forget to make changes to their IRAs, 401ks and other retirement accounts after a life-changing event like a marriage, a divorce, a birth or a death. When any of these big things happen in your life, emotions may take a front seat and you might find yourself saying, “I’ll get around to changing my beneficiary later.” In too many instances, later never comes and family members pass without making the changes that reflected their true wishes. There are a lot of savers out there who inadvertently end up leaving one of their biggest assets (their retirement fund) to an ex-spouse or dividing up their IRA between their older children but not including the much later born child from a second marriage. Very likely, in these cases, the new spouse or the younger child could take their case to court, but it’s expensive and they’re not guaranteed to win.
Another important tip: always, always name one or more contingent or secondary beneficiaries. I promise it saves time and worry later. In my practice with a typical married couple when each owns an IRA, each spouse names the other as primary beneficiary and then they each name their children as contingent beneficiaries. If one is widowed, you might name your children as equal primary beneficiaries and your grandchildren as contingent beneficiaries. If your primary beneficiary predeceases you, you fail to update the primary beneficiary and there is no contingent beneficiary named, the waters get muddied and it will be up to a judge to decide who gets your hard-earned money rather than you.
It’s not common, but I’ve seen some people designate their primary beneficiary “as per my will”. Please don’t do this. “As per my will” is not a valid beneficiary designation and will lead a judge to settle the matter of whom, in fact, inherits.
Almost as bad is someone who lists their primary beneficiary as “my estate”. First, we need some background. The “Setting Every Community Up for Retirement Enhancement” Act of 2019 is commonly referred to as the SECURE Act and it changed forever how beneficiaries receive the proceeds from loved ones’ retirement accounts. Prior to 01/01/20, if someone died and left a legacy through a retirement account beneficiary form to anyone other than a spouse, that person could stretch the number of years over which they took those retirement funds to reflect their own life expectancy. After 01/01/20, most non-spouse beneficiaries have been forced to empty the retirement accounts within a 10 year window. There are a very few exceptions, two of which are if the named beneficiary is disabled or chronically ill. In a case such as this, that person can still stretch payments from the accounts over their expected lifetimes. If a person lists their primary beneficiary as “my estate”, the beneficiary immediately changes from a person’s name to a “non-person” and causes the normal 10 year window for most non-spouse beneficiaries to become a 5 year window. Rather than a child or other relative or friend to have 10 years over which to spread distributions and the taxes on those distributions, the time frame automatically shrinks to five years meaning bigger distributions, bigger tax bills and perhaps even a higher tax bracket with the much larger chunks of money coming in. To add insult to injury, I’ve even heard from another advisor the tale of a father who named his retirement account beneficiary as “my estate”, thinking it would go to his disabled son and support him throughout his lifetime. According to the SECURE Act, if the father would have listed his son by name on the beneficiary form, the son would be able to take the exception to the SECURE Act’s 10 year window and spread saving compounding, distributions and taxes over his whole life. Because the father was uninformed and used the beneficiary designation “my estate”, the son was forced to suffer the consequences of only having 5 years to take payments.
Do you have IRA or retirement questions? I’d love to be of help! Please email [email protected] or call 563-949-4705.
Securities offered through J.W. Cole Financial, Inc. (JWC) Member FINRA/SIPC. Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Huiskamp Collins Investments, LLC and JWC/JWCA are unaffiliated entities.