It is currently estimated that Americans have more than $5 trillion invested in IRAs, and much of this wealth will pass to their heirs. To ensure that it does, be sure you are not committing one of these five costly errors:
1. The Missing Form
- if your family doesn't know where to find your IRA beneficiary form, then they will be stuck with the default provisions of your plan - which may mean the IRA assets go to your estate, which is not where you want them to go. Be sure you get an acknowledged copy of your IRA beneficiary form from your plan administrator and keep it with your other important estate planning documents.
2. The Out-of-Date Form
- you should review your IRA beneficiary form after major life changes, like a divorce, marriage, birth of a child, etc. Even if you include a beneficiary for your plan in your will, the form still rules. You could inadvertently disinherit a loved one, or worse - have your IRA assets go to the wrong person.
3. No Back-up Beneficiary
- if you do not name a back-up beneficiary, a probate court will decide where the assets will go. If you only name your spouse and your spouse dies before you do, then the assets will likely be liquidated and taxed, with the remainder going to your estate. If you name a child as beneficiary, remember that you cannot name a minor! If your children are not yet 21, you can set up a trust with instructions for distribution.
4. Not Taking Advantage of the Stretch
- setting up your beneficiary designation to stretch IRA payments over the lifetime of a beneficiary can grow those assets significantly over time, tax-deferred. Unfortunately, this is often undone by beneficiaries who want to cash out immediately - in fact, the IRS says this happens 90 percent of the time. You can prevent this with an IRA Stretch Trust.