Beneficiary designations have precedence over wills. Therefore, if you have accounts with assets to pass on to heirs, be sure to update them regularly.
CNBC’s recent article, “Out-of-date beneficiary designations are a common and costly mistake,” says that naming beneficiaries can come with unexpected costs, like deeding money to an irresponsible minor. Many people still have ex-spouses or deceased relatives named as a beneficiary on a retirement account or on a life insurance policy purchased long ago.
That is why it is critical to review these after marriages, divorces, births, adoptions, deaths, and other major life events.
Beneficiaries for some retirement accounts can be easily reviewed and changed online. For others, the account holder just has to ask for the right form from the administrator.
If you don’t have any named beneficiaries—either because you never named them or your beneficiaries pre-deceased you—your assets may pass to your estate or be forced to go through probate. This can create expenses and headaches.
If your IRA winds up going to your estate, instead of to a named beneficiary, the estate can be forced to withdraw funds and pay the tax on those withdrawals in a short time.
In addition to traditional, Roth, SIMPLE and SEP IRAs, beneficiaries should be checked on 401(k) plans, 403(b), and deferred-compensation employer plans, life insurance policies, 529 education savings accounts, and any bank or other investment account that’s designated as “Transfer on Death.”
Naming a minor child or other person incapable of managing funds, is another possible mistake.
Giving money to a high earner, who’s then pushed into a still-higher tax bracket could be another problem you should try to avoid.
Reference: CNBC (April 17, 2018) “Out-of-date beneficiary designations are a common and costly mistake”
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