When it comes to passing on your assets after death, the IRA beneficiary form trumps your will. If your will says your son inherits everything, for example, but you name your sister as sole IRA beneficiary, she inherits the account assets. If you don't name a beneficiary, the IRA assets are usually distributed based on your will, but this isn't ideal for your heirs.
Picking a beneficiary doesn't guarantee your IRA will go the person you want. If your beneficiary dies and you don't pick a new one, for instance, the IRA administrator will handle the account as if you hadn't named anyone. If you divorce after naming your spouse as beneficiary, in some states she can still inherit the account if you don't update the beneficiary designation. If your intentions no longer match what's written on the beneficiary form, that's not the administrator's problem.
When there's no beneficiary, your IRA administrator usually makes your spouse or your estate the beneficiary, depending on his firm's policy. If your estate inherits, your executor distributes the assets according to the will. The IRA has to go through probate first, which gives your creditors the right to claim the assets to pay your debts. Another drawback is that if you die before turning 70 1/2 -- when the IRS starts requiring minimum annual withdrawals -- your heirs have to empty the account within five years.
If you intend to share the assets equally, most administrators will accept you designating all your surviving children as equal beneficiaries. You need to make it clear on the form what you want to happen if one of your beneficiaries predeceases you. You can have his share pass per stirpes -- that is, the deceased beneficiary's children inherit and divide up their parent's share -- or you can have the deceased beneficiary's siblings each take a larger share. If you're not sure how the form reads, ask the account administrator to help you get it right.
When you name your primary IRA beneficiary, pick a couple of contingent beneficiaries who inherit if the beneficiary dies ahead of you. Review the beneficiary designations regularly and make changes as your life changes. It's not only divorce or death that may necessitate updates. If you start out with a small IRA, for instance, leaving it to one of your kids may make sense. After a decade or so of steady growth, you might want to give all your children a share.
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