Here’s a good summary of some key points to naming IRA beneficiaries. We’ve included these and more in past issues of Retirement Watch. It’s a good review for my readers and a useful introduction for those who haven’t been members yet.
Clients who pay big bucks to have lawyers prepare wills and trusts often complete their IRA beneficiary designations without any professional advice. Worse yet, some forget to fill out these forms at all. The result may be that loved ones get much less than intended, while creditors, an ex-spouse or ne’er-do-well relative wins the IRA lottery.
Beneficiary designations affect not only who gets the assets, but how quickly funds must be withdrawn from the account. Until then, investments held in the IRA wrapper can grow tax deferred, in the case of a traditional IRA, and tax-free, in the case of a Roth. So when beneficiary designation mistakes accelerate payments from these accounts, heirs lose substantial tax advantages. The IRS rules about designating beneficiaries are draconian. And when it comes to mistakes in these forms, the Service is rarely forgiving.