An Heir-Tight IRA

Money-Guy 08-28-2009

Today’s show is one of those nitty-gritty topics that may not always be the most fun or most exciting, but it is definitely one of the most important. Today I want to share the significance of making sure that your beneficiary designations are up-to-date and still reflect your posthumous wishes.

One thing that many individuals don’t realize is that the designation on your IRAs, life insurance, pensions, 401(k)s, and other retirement plans actually trump what your Will says. Another common misconception is that there is no point in naming contingent beneficiaries. When you leave the contingent section of the application blank,  it defaults to your estate, and, while you are correct to assume that it will pass according to your Will, you may not realize how much of a headache you can save your heirs by naming them as beneficiaries instead of forcing them to go through the probate process. It is absolutely necessary to review your designations after major life events such as deaths, births, marriages, and divorces.

When naming several beneficiaries, you also need to think about what happens if one of the beneficiaries pre-deceases you. Depending on how you title the designation(Per Stirpes or Per Capita), the pre-deceased’s inheritance may be distributed amongst the other co-beneficiaries or it could pass on to the pre-deceased’s heirs.

In addition to avoiding the probate process, another key reason you want to designate both primary and contingent beneficiaries on your IRAs is so that your heirs may take distributions based on their life expectancies as opposed to your life expectancy. Assume you don’t designate beneficiaries and you pass before you begin taking Required Minimum Distributions at age 70.5. The IRS code states that your heirs must withdraw all of the money within 5 years of your death  (more than likely resulting in a hefty tax bill!). Now let’s assume you still don’t designate beneficiaries but you pass away after age 70.5. Under this scenario, even though your will dictated where the assets went, your heirs are now forced to take distribution payouts based on your life expectancy rather than theirs (which is probably longer).

As you listen to the show, I also walk through some other scenarios such as how to handle your IRAs if you want a portion to go to charity. While some of this can be very dry, if you understand the process, there are some remarkable generational and tax-saving planning techniques that can be applied. One of those strategies, as you’ve heard in previous shows, is deciding to covert some of your IRA assets into Roth assets.

Towards the end of the show I share an article written by one of our close media contacts Erin Peterson. Erin wrote an article for Bankrate.com titled  “6 financial experts and their worst goofs“. In this article Erin interviews some top financial experts and, yes, even those of us well versed on financial topics have made some pretty poor decisions along the way. The article contains some goofs from Jean Chatzky, Ramit Sethi, Vicki Robin, Jonathan Clements, Dave Ramsey, and yours truly, Brian Preston. Take a look at it and hopefully you can learn from our mistakes!

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