Why It's So Important to Name a Beneficiary for Your Self-Directed IRA

Do you know what you want to happen with your IRA funds and assets when you pass? Then it’s worth taking the time to properly set this up with your IRA custodian. That way you can ensure your account will be passed to your loved ones as you intended, even when you’re not there.

Here’s why who (and how) you name your IRA beneficiary makes a difference.

You Don’t Have to Name a Beneficiary When Opening Your IRA (But Maybe You Should)

We have to ask, but you don’t need a beneficiary listed on your self-directed IRA— though it’s a good idea to list a few. You might be thinking, it’s fine— I already have a will with my wishes spelled out, I don’t need to do this!

Though your IRA is technically covered by your will, it’s a much better idea to spell out your inheritance plans for your IRA directly with your IRA custodian— and we’re not just saying that because IRAR’s an IRA custodian. There are real benefits for you and your heirs. 

If You Don’t Name A Beneficiary, Your IRA Could End Up Stuck In Probate

If you don’t name a beneficiary and aren’t married (there are special rules for spousal IRA inheritance), your IRA could end up stuck in probate. This can be expensive and time consuming, and the funds to pay for this come out of your estate— leaving your heirs with less than you intended and causing unexpected headaches.

If you know how you want your IRA assets and funds to be divided, why not spell it out explicitly with your IRA Custodian? That way you can save your loved ones lots of time, money, and headaches by specifying this beforehand.

How You Designate Your Beneficiaries Impacts Their Inheritance

Who —and how— you list a person as a beneficiary impacts how they’ll inherit your IRA.

For example, a primary beneficiary will inherit before a contingent beneficiary, and the percentages outlined will be followed exactly as spelled out. For example, your son could be listed as the primary beneficiary and his son (your grandson) as the contingent beneficiary.

Be sure you correctly note these details, as a mistake can cause the wrong person to inherit or even land your IRA in probate.

You Can Make Sure Your IRA Ends Up In The Right Hands

Your IRA beneficiaries supersede your will or trust. That means whatever is listed on your account, that is the final say on the matter, even if you later updated your official death documents.

If you don’t have a beneficiary listed on your IRA, any funds and assets your IRA holds will be lumped into the rest of your estate. If you forget to update your IRA beneficiary, your old beneficiary will inherit, no matter what is listed on your will.

Inheriting Through an IRA Gives Your Beneficiaries More Options

Inheriting an IRA directly (verses through an estate) enables your heirs more flexibility and benefits than inheriting in other ways.

When listed as an IRA beneficiary, your spouse could take ownership of the IRA and treat it as theirs— a special benefit to spousal IRA inheritance laws they aren’t able to take advantage of once your assets are distributed. Non-spouse beneficiaries can keep the funds in the IRA for a period of time, again enabling them more options for investing and saving for retirement than if managed through the typical inheritance process.

If these funds are distributed from the IRA and then split among your heirs, these options vanish.

Relevant: Inherited IRAs: Beneficiary Rules for Self-Directed Investors

Naming Your Trust as Your Contingent (Secondary) Beneficiary

You could just name your trust as your primary beneficiary, but when doing that you limit the options of your heirs.

If your estate is your primary beneficiary there are only two options: distribute to the estate and pay the taxes or (depending on the trust qualification) distribute the funds within fives years of the decedent’s death. As noted earlier, there are a lot of tax advantages to keeping your IRA funds in a retirement account, and trust is limited in how those benefits can pass on.

TIP! To ensure your heirs get the advantages of retirement savings (including the tax benefits), some of our clients list an individual (like their spouse or children) as the primary beneficiary(ies), and their trust as the contingent (or secondary) beneficiary. That way there’s a backup plan for the worst-case scenario (and your IRA wont get stuck in probate), but your intended heirs still get the option of IRA-advantaged investing.

What Happens If Your Self-Directed IRA Doesn’t Have a Beneficiary?

If you don’t assign a beneficiary for your IRAR IRA, your custodian will distribute the funds and assets to a “default” beneficiary. This beneficiary may or may not be who you intended to inherit the account, and this may open your beneficiaries to unexpected expenses and delays.

Adding or Updating Your IRA Beneficiary

It’s a good idea to have both primary and contingent beneficiaries for your IRA, because you never know what might happen. In the event one or more of your primary beneficiaries are unable to inherit, it’s nice to know the people you intend will still end up with the assets you planned to leave to them. Be sure to specify percentages or specific assets intended for each beneficiary, if appropriate.

You can change your IRA’s beneficiaries as often as you like using our Beneficiary Form, found at IRAR’s forms page.

If you forget to update your IRA beneficiary, the wrong person may inherit your assets. Don’t let this happen to you. Keep your account updated.

In a Nutshell

We encourage our clients to keep their beneficiaries updated, and you can probably see why. We’ve been around for a long time, and we’ve seen firsthand what can go wrong if things aren’t set up as expected. But it’s not hard to set up or update your beneficiaries— just fill out IRAR’s form and submit it to us. If we need anything else, we’ll get in touch.

Do you have any more questions about this process, or how to get your beneficiaries set up? Give IRAR a call or email— we’re here to help.