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It’s a big mistake to not name an IRA beneficiary

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It’s a big mistake to not name an IRA beneficiary

On Behalf of | May 16, 2019 | Estate Planning, Firm News

Many Colorado residents worry about properly saving or investing the money in their Individual Retirement Accounts. However, the biggest mistake an account holder can make is failing to name the right beneficiary. It may seem like a small detail, the sort of thing that a person can just take care of later, but overlooking it can cost the person’s family a lot in terms of aggravation and cash.

IRA owners will often fail to update beneficiaries or leave the beneficiary designation blank altogether. When the designation is blank, the IRA gets transferred to the person’s estate immediately when they die. In some cases, a large tax liability may be created out of nowhere.

Federal laws require that the account owner’s spouse is the designated beneficiary of a 401(k) except when the spouse has signed a waiver. This requirement does not extend to IRAs except in community property states. Naming the spouse as the beneficiary is among the best strategies because it stretches tax obligations over a lifetime. Only the spouse can retain the same rights as the IRA owner after transfer.

In cases when the spouse already has sufficient financial resources, it might make sense to name the children as beneficiaries. If a kid inherits funds from a retirement plan, they can put it into an inherited IRA, which grants tax benefits. The inherited IRA owner must take a required minimum distribution every year.

Those who have questions about IRAs, 401(k)s or other retirement accounts may want to reach out to a lawyer. An attorney with experience in estate planning law might help the client identify and organize assets or plan for death or retirement. A lawyer could assist with the drafting of a will or create trusts to transfer assets outside of probate.