IRA Beneficiary Rules to Protect Your Family

by Neal Frankle, CFP ®

There are a few IRA beneficiary rules you need to know that can save your family money and grief. The first and most important rule is that your beneficiary form determines who gets your money when you are gone.

It doesn’t matter if you have a family trust or will. The beneficiary form rules supreme.

The second rule is, don’t forget the first rule.

One of my colleagues told me about a disaster just this morning. It happened because Jim (her client) forgot about rule #1. Jim and Debbi divorced over 10 years ago. Before the divorce, Debbi was Jim’s beneficiary. The divorce decree mandated that Jim hand over 50% of his IRA to Debbi – which he did. But he never changed the beneficiary designation.

My colleague Melinda told her client Jim to update his IRA beneficiary form but he never got around to it. He set up a will and a trust after the divorce and thought he was covered. Can you guess what happened?

Jim dropped dead and Debbi is going to get the rest of the money. This is not what Jim would have wanted, but it’s the way it’s going to be.

And it’s a shame. Jim’s new spouse was counting on that money and now she’s going to be…shall we say…disappointed? This isn’t complicated. If you want to protect your IRA beneficiary, take care of this today.

Even if you haven ‘t divorced recently, you really should check your beneficiary forms every few years and make sure they reflect your wishes. You should do this no matter what – even if nothing in your life changes.

Your IRA beneficiary form is the most important estate planning tool you have. Please don’t ignore it. Of all the IRA restrictions, this is the one you should be most concerned about.

So…tell me, and please be honest…when was the last time you reviewed your IRA beneficiary forms? What have you done to protect your IRA beneficiaries?

 

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{ 8 comments… read them below or add one }

Jerrold Schiff January 19, 2011 at 4:56 PM

can you name a canadian resident as a beneficiary of an ira

relatives are all canadians
none have an american social security number and none of the earn money or pay taxes in usa.

Reply

pina June 23, 2010 at 11:08 PM

My Dying Brother with Cancer was asked by my sister if he could changehis IRA beneficiary from my moms name into her name by phone call. It happened in 2006. she only had attorney let us know what she was awarded. She kept it for self instead of Estate Plan of My Dead Brother. We were all surprised. cause kids didn’t get money and we saw no documentation on this? Is this allowed to happen even when its not listed on will only tangible assets must be shared? Thank you

Reply

halfnine June 10, 2010 at 10:44 AM

Yeah, she’s listed as my beneficiary.

I was more concerned about whether she’d be allowed to rollover the IRA and create her own (even as a non resident alien). The last thing I want is the whole thing to get distributed as a lump sum to her instead. The tax implications and higher marginal rate would defeat my purpose of having tax-deferred IRAs in the first place. And, if that was the case I’d have change my thought process which would probably mean either moving more towards ROTHs or changing the beneficiary to a child that would be a US citizen.

Reply

Neal@Wealth Pilgrim June 10, 2010 at 7:13 PM

I believe that you may have to resort to one of your two solutions. Let me know what you dig up.

Reply

Rey December 9, 2010 at 10:22 AM

Please let us know what you discovered!
I have a family friend that is a non resident alien and her husband who is a legal resident just passed away tragically. She is 50 years old and needs his 401k for her and her 3 children.

Thanks!

Reply

Rey December 9, 2010 at 10:23 AM

Please let us know what you discovered!
I have an family friend that is a non resident alien and her husband who is a legal resident just passed away tragically. She is 50 years old and needs his 401k for her and her 3 children.

Thanks!

Reply

halfnine June 10, 2010 at 8:13 AM

When was I last looking at my IRA beneficiaries….oddly enough, just this morning. I’ve been banging my head against the wall researching estate planning. Considering my wife is a non resident alien and that neither of us reside in the USA, I had to look at see how it would effect her as a beneficiary and what her options would be.

Reply

neal June 10, 2010 at 8:27 AM

A complicated issue halfnine…Not sure of the rules on that. But make sure to check your beneficiary forms too just to make sure she is your bene.

Reply

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