Who Gets the Retirement Money?

By Beverly DeVeny, Chief IRA Analyst
Follow Me on Twitter: @BevIRAEdSlott

It’s February. Most of us who made 2016 New Year’s resolutions have broken them already. So, now it is time to move on and get down to fixing things that are totally within our power to fix. I’m talking about your beneficiary forms.

It generally takes about 30 seconds to complete a beneficiary form, and that is about all the consideration that is given to the document. Do you realize that the beneficiary form determines who will receive what could be a significant portion of your estate? Your will or trust does not determine who inherits your retirement assets, unless you name the estate or the trust as the beneficiary. The same holds true for annuities and life insurance that you own.

Each retirement account that you have has a separate beneficiary form. Your employer plans have their own separate beneficiary forms. Annuities and life insurance policies also have their own separate beneficiary forms. When is the last time you looked at any of your beneficiary forms?

Significant life events could change who you want named on your beneficiary forms. Events such as births, deaths, marriages, divorces, and adoptions could mean that you need to update some or all of your beneficiary forms. If you have divorced, do you want your ex-spouse to inherit your retirement accounts, annuities, or life insurance? If not, you better change those beneficiary forms! Nothing in the divorce decree will override a beneficiary form! Many courts have said so and the U.S. Supreme Court agrees.

The death of a beneficiary before you die could leave your retirement assets with no beneficiary. When that happens, the default language in the IRA agreement or employer plan will determine who inherits those retirement assets. The default option could be your spouse or your children. Some employer plans take it further and include parents and siblings in their default options. Many IRAs and retirement plans simply say that the estate is the beneficiary.

When the estate inherits retirement assets from the account owner, the ability to stretch distributions over a beneficiary’s life expectancy is lost. If the account owner dies before reaching their required beginning date (April 1 of the year after turning age 70 ½), the retirement asset must be fully distributed within five years. If the account owner dies after their required beginning date, the retirement asset can be distributed over their remaining life expectancy as determined on the Single Life Expectancy chart. Those options are what the tax code allows. Many IRAs and employer plans will mandate an immediate lump sum payout to the estate. This payout cannot be moved into an inherited IRA for either the estate or the beneficiaries of the estate. It will be a fully taxable distribution.

If you update any of your beneficiary forms, keep a copy of the form for your records – just in case the company “loses” your form. And if you think they don’t lose the form, you are wrong. They lost mine, and they didn’t even merge or move. After you submit the form, ask the company to confirm to you, in writing, who the beneficiary is on your account. Keep that response with the copy of the beneficiary form.