Schedule a Call Now
Schedule a Call Now
Skip to main content

Choosing Your IRA and 401 (k) Beneficiaries

The Secure Act of 2019 made several changes to how beneficiaries of retirement plans must distribute their inheritance. Before 2020, individuals could take their required minimum distributions (RMDs) based on their life expectancy. Now, non-spousal beneficiaries will be required to distribute the entire balance within 10 years. When selecting your beneficiaries, it is important to know the impact of income tax and estate tax laws.

Who can be a beneficiary?

An individual, trusts, charities, or your estate can inherit retirement accounts, each having unique tax considerations.

  • Your spouse: When it comes to taxes, they are usually the best choice for a primary beneficiary. Your spouse can roll over your 401 (k) or IRA to his/her IRA or plan and treat the assets as his/her own.
  • Other Individuals: A non-spouse beneficiary can roll your assets into an inherited IRA. They would then be required to distribute the entire balance within 10 years.
  • Trusts: You must follow special tax rules and there may be income tax complications. We suggest seeking legal advice before making this designation.
  • Charities: This will not affect required distributions during your lifetime, but after your death, having a charity named with other beneficiaries could affect tax-deferral possibilities of the noncharitable beneficiaries.

What if I have multiple beneficiaries?

You can name more than one person or entity as your primary beneficiary, and you can specify the percentage of your assets that each beneficiary will receive. Additionally, in the case your primary beneficiaries don't survive you, you can name multiple contingent beneficiaries.

  • Per stirpes vs. per capita: Per stirpes is a legal term in Latin meaning “by branch”. If a beneficiary were to pass away, the inherited assets would pass on to their children in equal shares. On the other hand, per capita means “by head” and if the beneficiary passes away, the assets do not flow to their heirs.

What happens if I don't designate a beneficiary?

The assets are typically paid to your estate. This is not the best option as funds will go through probate. Probate is the court process by which assets are transferred from someone who has died to their heirs. This process can be timely and costly, plus the assets must be distributed over five years.

Things to consider:

  • Beneficiaries of pre-tax 401 (k) accounts and traditional IRAs must pay ordinary income tax on distributions.
  • Cash, bank accounts, stocks, and real estate pass to your beneficiary without income tax being due.
  • A Will or Trust does not override your beneficiary designation.
  • You should review your beneficiary designation at least every two to three years, making sure your beneficiaries line up with your Will and Trust documents.

If you have any questions or would like to make changes to your beneficiary designations, we can help. Visit our team page to learn more or call us, at (502) 290-1905.

Check the background of this financial professional on FINRA's BrokerCheck
Check the background of this financial professional on FINRA's BrokerCheck