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IRA Beneficiaries: It’s all about the Benjamins

IRA Beneficiaries: It’s all about the Benjamins

Don’t have a spouse or son named Benjamin? Fear not, I was talking about hundreds of $100’s you need to consider when choosing a beneficiary for your Individual Retirement Account(s) (IRA).

You’ve worked hard to build your retirement savings, and naturally, you want to ensure that it’s passed into the right hands after you’re gone. Choosing your beneficiary is a decision that goes beyond just personal preferences—it can have significant financial implications for your loved ones and even impact taxes. Let’s dive into why choosing the right beneficiary matters and what steps you can take to ensure your wishes are fulfilled.

First and foremost, you want your hard-earned money to benefit those you care about most. Whether it’s providing for your spouse, children, or other family members, selecting the appropriate beneficiary ensures that your assets are distributed according to your wishes. Additionally, considering the tax implications of your choice can potentially save your beneficiaries from unnecessary financial burdens down the line.

$150k on the line: A True Story

Let’s take a look at this situation on a granular level. I have a client, whom I will call Karen. After her spouse Keith passed away, Karen found herself facing decisions regarding his $500k IRA. Initially named as the primary beneficiary with her son as the contingent beneficiary, Karen believed this setup would be the best way to pass on funds to her son. What Karen didn’t know was that by keeping the IRA in her name, she could withdraw funds over time, potentially reducing the tax burden. By choosing to keep the fund herself and then passing it to her son, she can spread the tax burden out over her lifetime (assuming an additional 15 years). This means a total of 25 years (15 for herself and 10 for her son), compared to her son withdrawing the entire amount within ten years. This decision ultimately saved her family a whopping $150k in taxes—a testament to the importance of thoughtful beneficiary planning.

YEAR KEEP IRA (Karen) GIFT IRA NOW
IRA Balance Brokerage (After Tax) IRA Balance Brokerage (After Tax)
0 $500,000 $0 $500,000 $0
5 $570,000 $123,000 $651,000 $56,000
10 $605,000 $350,000 $834,000 $162,000
11 $606,000 $414,000 $0 $785,000
15 $578,000 $738,000 $0 $1,030,000
After-Tax Value $440,000 $738,000 $0 $1,030,000
Total Value $1,178,000 $1,030,000

How Do Beneficiaries of IRAs, 401(k)s, and 403(b)s Work?

Understanding how beneficiary designations work is crucial for effective estate planning. In the event of your passing, these designations dictate who receives your retirement account assets. If you fail to designate a beneficiary, the fate of your funds could be left to the discretion of the court, leading to potential delays and additional costs associated with probate.

For married individuals, spouses typically inherit retirement account assets automatically. However, for those who are unmarried or wish to designate alternative beneficiaries, it’s essential to specify these preferences through the appropriate channels.

Trust or True Love?: It’s not a matter of the heart

Deciding between naming a trust or an individual as the beneficiary of your retirement accounts depends on various factors, including your estate planning goals and the specific circumstances of your beneficiaries. While trusts offer certain advantages such as added control over asset distribution and protection against creditors, naming individuals directly may simplify the process and provide more flexibility in managing inherited assets.

A Handy Checklist

When it comes to reviewing beneficiary designations, it’s essential to assess all relevant retirement accounts. Here is a helpful checklist you can use to ensure all your accounts are…well…accounted for:

  • Individual Retirement Accounts (IRAs)
  • 401(k)s, 403(b)s and other retirement accounts
  • Checking and Savings accounts
    • Transfer on Death (TOD) or Payable on Death (POD)
  • HSA’s
  • Any other account that you own without beneficiaries (i.e. 529 already have a beneficiary)

What you can do now

Take proactive steps to review and update your beneficiary designations. Start by gathering information on all your retirement accounts and other relevant assets, then carefully consider who you want to designate as beneficiaries. Don’t forget to include contingent beneficiaries to accommodate for unforeseen circumstances.

The beneficiary designation for your IRA is a critical aspect of estate planning that could save your loved ones a tremendous amount of money with savvy tax strategies. Extending the amount of time your loved ones have to withdraw your savings after death could save them hundreds of thousands of dollars in taxes. Take action today to secure your financial legacy for tomorrow.

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IRA Beneficiaries: It’s all about the Benjamins

Episode 138 •

09th April 2024