Who Should Be Your IRA Beneficiary?

By Sarah Brenner, JD
IRA Analyst
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IRAs are for saving for retirement. However, as these accounts have grown over the years, many IRA owners still have significant funds in their IRA at their death. This means that estate planning for IRAs is essential. Effective estate planning for your IRA starts with your beneficiary designation form. Whoever is listed on that form will be considered the beneficiary of your IRA. You must give serious thought to who that should be. The outcomes will be very different depending on your choice.

Name your spouse. This is a very popular option and why not? For many people a spouse is the logical IRA beneficiary and this can be a good move from a tax and estate planning perspective. Spouse IRA beneficiaries have options that nonspouse beneficiaries do not have. A spouse can do a spousal rollover to her own IRA. They may also be able to delay required minimum distributions (RMDs) from an inherited IRA in some cases.

There is no federal requirement that a spouse be named as an IRA beneficiary the way there is for some company plans. However, in community property states you may be required to name your spouse as your IRA beneficiary unless a spousal waiver is obtained.

List your other family. This is another common choice and a good one. By naming a younger family member directly on the beneficiary form, you can maximize the stretch for RMDs after your death. Siblings are also a frequent choice for an IRA beneficiary and if named directly on the beneficiary designation form could take advantage of the stretch.

List a friend or neighbor. There is no requirement that a beneficiary be a blood relative. It is not uncommon to see friends, neighbors, or long-time partners who never happened to marry as IRA beneficiaries. All of these beneficiaries may qualify for the stretch if named on the beneficiary designation form.

Go with a trust. If you have a larger IRA or have concerns about controlling your money after your death, you might want to go with a trust. A trust can be especially valuable in cases where there are young children or those with special needs. If drafted properly to comply with the rules, it is still possible to get a stretch payout to a trust beneficiary when it comes to RMDs. However, trusts are complicated and expensive and should not be named as a beneficiary of an IRA unless there is a really strong reason.

Give to charity. A traditional IRA is a great asset to leave to charity. Why? Most traditional IRA funds are taxable and the charity can avoid those taxes. However, since a Roth IRA is generally not going to be taxable, it is a less favorable option to go to a charity.

Leave it to your estate. This is almost always a bad choice! This is because an estate is not a designated beneficiary under the RMD rules. So, if you name your estate on your beneficiary designation form, the maximum stretch of RMDs will be lost. Many times the estate becomes the beneficiary by default. This is because many IRA documents list the estate as the default beneficiary. If no beneficiary is named or if the only listed beneficiary predeceases the IRA owner, the estate will then become the beneficiary. Don’t let this happen to you. Be sure your beneficiary designation form is complete and up to date.