How To Avoid IRA Rollover Mistakes, Part 2

By Jon L. Ten Haagen

Once again, this is your hard-earned money for your retirement. You want to make sure these monies are properly moved from your retirement account (401(k), 403(b), 457, etc.) to your Individual Retirement Account. Here are a few things to be aware of:

Making Spousal Rollover Errors. Look at all the options available to you before deciding what to do. You are allowed to treat your deceased spouse’s IRA as your own, or roll over your spouse’s assets into your own IRA. If you don’t need the money or have a large estate and don’t want the IRA assets to be taxes as part of the estate when you die, it may be more tax-efficient to disclaim the assets and allow them to pass to your spouse’s contingent beneficiary(s).

Not Naming a Beneficiary. As an IRA owner, you are not required to name a beneficiary (though most IRA trustees insist on you naming one. Normally an IRA asks you to name a primary beneficiary – the person(s) you want your IRA assets to go to when you pass. They also ask you to name a contingent beneficiary(s) which is mean to be activated if your primary beneficiary is no longer alive. It may seem hard to believe, but something as simple as naming a beneficiary on a proper beneficiary form could cause the unnecessary loss of thousands, and even millions from your estate. Failure to name beneficiaries directly effects who will receive your IRA assets and the long-term value of the IRA payout after your death. In addition, not naming a beneficiary could result in an accelerated payment schedule upon your death, potentially increasing the tax burden on the distribution recipients. Don’t you want the maximum amount going to your heirs rather than the U.S. government?

If your IRA does not have a named beneficiary when you die; it will typically have to pass through to your estate. The estate may have to go through probate, which can be expensive and time consuming. Even worse, the entire account balance may have to be distributed to the estate by the end of the fifth year after your death. This rapid payout may cause a large tax bill, plus the plus the loss of future tax-deferred growth for your beneficiaries. Completing beneficiary forms incorrectly can have a significant impact on your estate.

Not Updating Beneficiary Designations. I see this far too many times. Another child is born and not added to the beneficiary designation. The same is when a divorce occurs and the ‘ex’ is not removed. There was a famous case in New York years ago when the owner of the IRA, who was not married when she opened the account, never thought to change her beneficiaries from her uncle and sister to her husband after she married. Years later, when she died, her uncle had died, but her sister was still around, and even when the husband went to the highest courts, the sister got the IRA proceeds valued at over $1 million! So, if you have an IRA and you have not reviewed the beneficiary designations on your 401(k) (and other qualified accounts) do it now!

Just as you are not required, as the IRA owner, to name a beneficiary, you are not required to update beneficiary designations when life events occur. So, if you experience a birth of a child, death of a beneficiary, a divorce, take out and review your beneficiary designations and change them. Not doing so could mean that your hard earned retirement assets will go to the wrong people. This review should be part of your annual review of policies. Again, be sure to work with a knowledgeable certified financial planner.