IRA Beneficiary Planning Strategies


 IRA Beneficiary Planning Strategies

It's a common misconception that people can inherit an IRA from anyone they please. This is not the case. In fact, in order to qualify as a beneficiary, you generally must be explicitly named in the deceased's will or trust document as a beneficiary. If not, then your first step should be to contact the IRA custodian or check for other assets that might have been left to you.

In this post, we'll go over some of the most common mistakes people make when it comes to inheriting IRAs, and offer some tips for how to avoid them and what you can do if you find yourself in this unfortunate situation.

Mistake #1: Waiting too long before naming a beneficiary.

If you're the named beneficiary of an IRA or 401(k), then you should name a successor trustee as soon as possible. But, according to the IRS, "Generally it is best for the successor trustee to be named within 90 days of receiving notice of death." This means that if you know or suspect your deceased loved one was planning on leaving you some money in his/her will, don't delay. After receiving notice of death, call a lawyer, and prepare your will and trust documents so that when it's time to change the will or trust document with regard to IRAs or other assets, you'll already have done so.

Mistake #2: Leaving the trustee too little time to conduct a will or trust document.

A will and trust document can be tricky things to change over time, but if you really want to name a successor trustee as your beneficiary, then you should include the successor in your original plan as soon as possible. Don't wait until you have multiple months before the death. If left too long, the successor may become impossible for your loved one's attorney or financial advisor to contact because he/she may have moved or changed his/her address in the interim. You can avoid this problem by providing the successor legal documents that were already prepared, such as certified copies of prior wills and trust documents.

Mistake #3: Your loved one has named someone else as his/her beneficiary.

If you believe someone you care about or love very much has named another individual as his/her IRA beneficiary, then the first thing to do is to consult with an attorney in your area. You should also consider contacting a custodian of your own, such as Schwab. Some 401(k) plans have a provision that allows for "spiking" an account balance prior to death, which might allow you or another beneficiary to receive the money from the account earlier than would otherwise be possible. Contacting a professional can help you determine if this is possible in your situation.

Mistake #4: Not changing the beneficiary name on the account.

It's very important that you change the person named as IRA beneficiary on your loved one's account to another person, as soon as possible. If you fail to do so, then you will forever be stuck with a lien against your inheritance, which could cost you tens or even hundreds of thousands of dollars. According to a recent study by Vanguard, if you wait more than three years to change that name, then when your loved one dies and there is no successor trustee named in his/her will or trust document, Vanguards says the government will take over the money in that account.

Mistake # 5: Your loved one has named you as beneficiary of his/her IRA or 401(k) account.

If you're named as beneficiary of your loved one's IRA, then you have a very strong incentive to make sure all the distributions are taken out of the account before your loved one's death. The same is true for any 401(k) plan that allows for distributions during the beneficiary's lifetime. If you fail or delay taking distributions from the account prior to death, then when it comes time to distribute the funds, there may be no money left in the account at all– and this could result in a huge loss to you.

So, if this has happened to you, then you should consult with an attorney immediately.

Mistake #6: You're named as a beneficiary and you refuse or fail to sign a required Federal Form.

If your loved one has named you as a beneficiary of his or her IRA or 401(k) and they've died without naming a successor trustee, then the first step is to sign a Federal Form bequeathing the assets to yourself. This form will have been prepared by your loved one's executor and/or financial advisor upon your death. The form is specifically for bequeathed IRAs, so it's important that you get advice from an attorney who specializes in estate law or trusts.

If you fail or refuse to sign the form, then you will be penalized by the government. The penalty is currently 50% of the cash value of your inheritance, which can be as high as $100,000. The penalty will also continue to grow with each passing year until it reaches a maximum of 25% of all assets in your IRA account.

The best course of action when faced with this situation is to immediately contact an attorney who specializes in estate law and trusts and then see if it's possible to change the beneficiary on your loved one's IRA account so that the new beneficiary does not trigger a penalty. If this cannot be done, then sign the form and begin taking distributions from the account as soon as possible.

Mistake #7: You fail to rollover other retirement accounts into your new IRA.

If you're an individual, then you'll need to make sure any rollover IRAs you had at other employers are rolled over into your new account. If you don't have any transactions in your rollover account, then you'll need to contact the trustee and ask about this.

Mistake #8: You fail to transfer the assets from the old IRA or 401(k) plan into your new IRA or 401(k).

If your loved one has named you as a beneficiary of his or her IRA or 401(k), then it's important that you make sure the assets are moved into your new account. If not, then the assets could be frozen and held by the government for up to six months.

When transferring IRAs, 401(k)s or other qualified retirement plans, there's a few things to keep in mind:

You must contact the trustee of your loved one's account and tell them that you want to take distribution from this plan. You'll complete an IRS form called a 5498 for each year distributions were made from all qualified retirement plans through December 31st of that year.


In light of this article, it's very clear that when it comes to IRA or 401(k) benefits, there are some very important things you need to consider. Of course, if you do have a 401(k) or IRA that your loved one has named you as beneficiary of, then you should take the steps suggested above. As tragic as losing a loved one is, nothing will ever be worse than having nothing at all.

We can help you with this and answer any questions that might arise regarding your IRA or 401(k).

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