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PENSCO Blog

Fresh alternative asset insights and the latest news on real estate and private equity investing.

Have You Designated (Or Updated) Your IRA Beneficiary?

Just Married Car with Cans

  |  By Dimetra Pelekidis, CISP®, SDIP

Congratulations on your wedding! Your new baby! Your retirement! Now have you updated your IRA beneficiary information?

These well wishes all sound, well, entirely ridiculous. But the truth is that many investors overlook the simple, but important step of designating a beneficiary for their IRA. But failing to name a beneficiary or update one after major events like those listed above can cost money, time and potential heartache down the line.

Understanding IRA Beneficiaries

While an IRA owner is alive, he or she can name an IRA beneficiary and then change that beneficiary as needed. IRA account owners often update beneficiaries after life changes—such as a marriage, the birth of a child, the death of a spouse, or a divorce.

IRAs can designate a person or a legal entity, like a trust or an estate, as a beneficiary. According to a blog from Ed Slott and Co, there are two advantages of designating a living person instead of a legal entity as a beneficiary for an IRA:

  1. Distributions from inherited IRAs can be stretched over the beneficiary's lifetime. This may allow decades of tax-advantaged investment returns to be earned and accumulate in the IRA.
  2. The IRA passes directly to the beneficiary, escaping complications like probate.

If the beneficiary is listed as an estate, charity or some trusts, then the tax code may severely shorten the amount of time over which the IRA must be paid out.

The Perils of Failing to Name an IRA Beneficiary

What happens when no IRA beneficiary is named? It varies based on the IRA agreement provided by the IRA custodian, which dictates who inherits the retirement account. However, these rules can make the IRA become part of the owner’s estate, making it subject to probate. According to a MarketWatch column, having the estate inherit an IRA, whether or not a will exists, can result in “the worst outcomes.”  

Not only might the eventual beneficiaries be required to distribute the entire IRA and pay taxes on those distributions within five years, but MarketWatch explains that probate can take months and involve substantial legal fees. In addition, probate is public record, allowing the public to determine what assets the estate owns.

Establishing Your IRA Beneficiary

Designating a beneficiary should be an easy and straightforward process with your IRA custodian.

At PENSCO, where we custody assets for our clients’ self-directed IRAs, clients often name a beneficiary when they first open an account. This can be done easily using our Alt-Nav™ online investing technology, and our New Account Wizard, shown below.

PENSCO screen shot form

Alternatively, a client can use our beneficiary designation form to choose a beneficiary. If an investor does not name a beneficiary when establishing an IRA, we will send a beneficiary form in a Welcome Packet.

Once chosen, IRA beneficiaries can be changed at any time. PENSCO clients can do so by either filling out a new beneficiary form or logging into their accounts.

To ensure your investments will benefit those you love, your beneficiary form should be reviewed and updated on a regular basis—especially after any significant life event. Setting aside a day each year to review critical financial documents, including your IRA beneficiary form, is always a smart idea.

At PENSCO, if you have questions about your IRA beneficiaries, you can reach us at 800.962.4238.

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.