Jeff Nowell, Senior Vice President of Wealth Management with People's United Bank, talks about the importance of beneficiary designations for IRAs and retirement plans.
What should people be aware of when it comes to beneficiary designations?
Beneficiary designations are how you tell folks where you want your IRA or employer sponsored retirement plan money to go when you die.
If you have an IRA or a retirement plan through your employer, you are generally required to complete a beneficiary designation with the IRA custodian or plan administrator when you open the account. But, it's also important to review your designations annually.
For a few reasons…
First, you may have had a life event-someone gets married, someone gets divorced, someone is born or someone dies. Any time a change like this happens, it is important that it gets reflected to the extent we want it to in our beneficiary designations. I've seen a number of cases where an ex-spouse ends up inheriting an IRA instead of the account holder's children, just because a beneficiary designation wasn't updated after a divorce. If you are married, the law generally requires that your spouse must be named your primary beneficiary on an employer sponsored plan.
Second, a beneficiary designation governs what happens to your retirement plan assets before anything else. In other words, you can update your will or estate plan saying one thing, but if your beneficiary designation says something else, the assets will pass according to the beneficiary designation.
Lastly, accounts with specific beneficiary designations will generally avoid the probate process. Without a designation, the probate court is left to determine how the assets should pass, which can lead to unnecessary costs and delays.
Can you name more than one person?
You can name more than one primary beneficiary; you just need to specify the portion of the funds you wish each to receive. Fractions or percentages usually make more sense than dollar amounts since values can fluctuate.
Are there any tax implications for the person your leaving it to?
Passing tax deferred assets can have consequences for those who receive them, so be sure to consult with your tax, legal, and/or financial advisors to help decide the best way to address all of these issues.