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5 Retirement Plan Beneficiary Mistakes to Avoid


Considering your eventual death and planning who will inherit your assets can be a difficult and uncomfortable task. In that process, though, it’s important to manage your retirement accounts and designate beneficiaries accordingly. Here are five retirement plan beneficiary mistakes you should avoid.

financial advisor can help you put an estate plan together for your family’s needs and goals.

1. You Weren’t Prepared to Designate a Beneficiary at All 

Being prepared to designate a beneficiary is critical. A beneficiary can be a person, an estate, a charity or a trust. And not having one can leave loved ones scrambling for answers after you’re gone and worst of all, possibly fighting over assets.

Before making a decision on a beneficiary, it’s important to check your state laws, and for good reason. Some states have different rules on who you can name as a beneficiary.

2. You Didn’t Change Your Beneficiary After Many Years

SmartAsset: 5 Retirement Plan Beneficiary Mistakes to Avoid

Circumstances can change in an instant. And your estate plan also needs to change to remain current.

Another common beneficiary mistake is to forget to update your beneficiary. Out-of-date beneficiaries can be common and cost your loved ones money. So whether the relationship with your beneficiary has broken down, or your beneficiary has unfortunately passed before you, it is important to update your beneficiary designation to protect assets for your loved ones.

Updating your beneficiary can be an effective way for assets to be distributed fairly among your loved ones.

3. You Didn’t Name Your Husband or Wife as Your Primary Beneficiary in Your Retirement Account

Not naming your spouse as a primary beneficiary can have unintended consequences.

With Congress passing the 2019 Secure Act, the bill removed a provision that would have allowed non-spouses to stretch out disbursements inside the inherited retirement accounts over their lifetimes. This is also known as the stretch IRA.

As a result, the rule now requires a full payout from the inherited IRA within 10 years of the account holder’s death. However, if you name your spouse as a beneficiary, this can stretch out IRA payments over the lifetime of your spouse.

If minor children are named beneficiaries, they don’t need to make withdrawals within 10 years of the account holder’s death either. The annual required minimum distribution (RMD) goes into effect when the child reaches the “age of majority” in his or her state. A lot of states have their age of majority set at 18 . Other states have their age set at 19.

Once the child reaches 18 or 19 depending on your state, or or she will be required to make distributions within the next 10 years of the age of majority.

Having your spouse as the beneficiary will allow them to move the inherited retirement account to their IRA and distribute it periodically.

4. You Named an Estate as the Beneficiary

If you named your estate as your beneficiary, it can create financial problems for your loved ones. One example: If you’re behind on paying your estate when you pass away, you can run the risk of the estate going to creditors.

Your estate can also go to probate court, which means that it will have to undergo a court-supervised process to validate your will. In this case, the court will first have to identify your final assets and pay your last debts before it can distribute your estate’s property to your heirs.

5. You Waited Too Late to Create a Retirement Plan

Sometimes later is better than never. But other times being late may in fact end up being never. If you never thought about creating a retirement plan or a retirement account, it can put your family at risk of different financial hardships. Having an estate plan can help safeguard your assets and your family’s future.

Don’t wait until you’re closer to retirement to start thinking about a plan or a beneficiary. By then, depending on your career, you may not have made enough money to create successful financial wellness for your family.

Bottom Line

SmartAsset: 5 Retirement Plan Beneficiary Mistakes to Avoid

Designating a beneficiary sooner rather than later is always the smart approach. Your family depends on you not just while you’re alive but also after you’re gone. Check your state laws to see if you need to adjust your beneficiary strategies. Constantly review your retirement accounts to see if they need changes. And check if your beneficiary needs to be changed as life circumstances change as well.

Estate Planning Tips

  • financial advisor can help you create an estate plan for your family. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • There are multiple types of wills and you may find that one can address your needs better than another. Here are some things to know about making a will.

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