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Without a named beneficiary for your IRA, your loved ones could lose out

by Susan Wright | Contributor
Oct 23, 2020


If you’ve been saving for retirement, chances are that you have an IRA (individual retirement account) or an employer-sponsored plan such as a 401(k). Over time, these accounts have the potential to grow exponentially – especially given the tax-deferred gains.

But if the unexpected occurs, what will happen to these funds? Without a named beneficiary, your hard-earned money could end up in the wrong place.

What are the consequences of not naming an IRA beneficiary?

While you may have future income plans for your IRA and qualified savings, it is important to have a backup plan in case the unthinkable occurs. Unfortunately, illness and accidents can happen. So, it is important for you to have one or more named beneficiaries listed on these accounts.

According to the IRS, a beneficiary can be any person or entity (such as a charitable organization) that will receive the benefits of a retirement account or an IRA after the owner passes away.

Following the passage of the SECURE Act, eligible beneficiaries include:

  • The surviving spouse of the original IRA account owner
  • A minor child (or children) of the original account owner
  • A disabled or chronically ill individual
  • Any individual who is not more than 10 years younger than the original account owner

When an IRA beneficiary is the account owner’s spouse, the survivor will typically have three options to choose from regarding what happens to the funds. These include:

  • Treating the account as his or her own (and designating himself or herself as the owner of the account)
  • Rolling the funds into either a traditional IRA and/or a qualifying retirement plan (such as a 403b or 457b)
  • Treating him or herself as the beneficiary of the account (with the option of rolling the money into his or her own IRA)

If an IRA beneficiary is someone other than a spouse, though, he or she may not treat the account as their own. Therefore, they are not allowed to contribute or roll any qualifying funds into their own IRA.

In addition, the IRA account must be completely distributed within 10 years of the original account owner’s death. These distributions may be taken over the 10-year time period, or all at once, provided that the account is fully depleted at the 10-year period.

It is important to note that the SECURE Act makes exceptions for IRA beneficiaries who are disabled or chronically ill in that they can receive such funds via required minimum distributions that are based on their own life expectancy rather than within 10 years.

The status of an IRA when it is inherited can also make a difference in terms of when the funds must be withdrawn. For example, if a traditional IRA owner had already started taking required minimum distributions (RMDs) from the account at the time of his or her death, the beneficiary must continue to receive distributions. In this case, the payouts can continue as originally calculated, or the beneficiary can submit a new distribution schedule.

However, if the original IRA owner had not started taking their RMDs, the beneficiary of the account has only a five-year time frame to withdraw the funds – and taxes will be incurred on these withdrawals.

Inherited Roth IRA accounts are also subject to a five-year rule. In this case, the beneficiary of the Roth IRA must liquidate the entire value of the inherited account by Dec. 31 of the year containing the fifth anniversary of the original account owner’s death. Without a named beneficiary on an IRA account, there can be some additional negative consequences with the IRA funds. These could include:

  • Probate
  • Increased taxes
  • Unintended disinheritance
  • Other distribution issues

If the IRA of a deceased individual goes to probate, the court can provide a ruling on the division and distribution of the deceased person’s assets. During this process, the executor of the estate will pay off any debt(s) and taxes that may be due.

Beneficiary Categories

Elgible Designated Beneficiary
(Distributions may be taken over the life of the beneficiary, except for minors)
Non-Eligible Designated Beneficiary
(10-year rule typically applies)
Non-Designated Beneficiary
(5-year rule generally applies)
Elgible Designated Beneficiary (Distributions may be taken over the life of the beneficiary, ecept for minors)Surviving spouse Non-Eligible Designated Beneficiary (10-year rule typically applies)Non-spouse beneficiary Non-Designated Beneficiary (5-year rule generally applies)Estate
(defaults as the beneficiary if none have been designed)
Elgible Designated Beneficiary (Distributions may be taken over the life of the beneficiary, ecept for minors)Minor child(ren) of the decedent
(minors qualify as eligible beneficiary only up to age of maturity, afterwards the 10-year rule applies)
Non-Eligible Designated Beneficiary (10-year rule typically applies)Successor beneficiary(ies)
(may be subject to 10-year rule)
Non-Designated Beneficiary (5-year rule generally applies)Charity(ies)
Elgible Designated Beneficiary (Distributions may be taken over the life of the beneficiary, ecept for minors)Disabled or chronically ill individual Non-Designated Beneficiary (5-year rule generally applies)Trusts
(that do not qualify as a designated)
Elgible Designated Beneficiary (Distributions may be taken over the life of the beneficiary, ecept for minors)Not more than 10 years younger than the decedent
Source: American Association of Individual Investors

In addition, there is a window of time – usually one year – where creditors may make claims against the estate for any money that is due to them. A probated IRA also means that the maximum deferral for a beneficiary is five years (and in some cases, a little as one year) – which could lead to significant taxation.

Therefore, when an estate goes through probate, it can take time for survivors to receive inherited assets. The amount of the assets they receive can also be diminished due to taxation of the funds, as well as the costs that are associated with probate. This is because the court can take a portion of the decedent’s gross estate. And, although probate expenses can differ from state to state, the court fees could be as high as 10% of the estate’s value.

If you have no beneficiary named – or if your beneficiary designation is outdated – other IRA distribution issues could come up, as well. For instance, if an ex-spouse is still listed as the account beneficiary, he or she could end up receiving funds that you would rather go to someone else.

Are your IRA beneficiary designations up to date?

Planning ahead for retirement is a crucial step in making sure you can live your ideal lifestyle in the future. But, if something were to happen to you beforehand, what will happen with your IRA proceeds?

If you don’t have a beneficiary designated on your IRA account – or if the named individual(s) or entity(ies) are not up-to-date – a significant portion of your savings could end up in the hands of Uncle Sam or another unintended recipient.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial planners and retirement income certified professionals can assist you in maximizing your retirement resources and help you to achieve your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling 833-219-6884 today.

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