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Overlooking beneficiary designations is a big IRA mistake: attorney
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LAS VEGAS — Millions of households have individual retirement accounts, and simple mistakes can be expensive, experts warn.
One of the most common IRA errors is overlooking beneficiary designations, which dictate who receives the account after you die, according to Brandon Buckingham, vice president for the advanced planning group for Prudential Retirement Strategies.
It’s “the biggest mistake people make,” said Buckingham, speaking at the Financial Planning Association’s annual conference on Tuesday. Some investors don’t name a beneficiary or leave an outdated heir. The latter is particularly problematic, since beneficiary designations override what’s outlined in your will, he said.
“I can’t tell you how many times I’ve seen an ex-spouse inherit an IRA or 401(k) account,” Buckingham said. “It happens all the time.”
As of mid-2024, nearly 58 million U.S. households, or about 44%, owned IRAs, up from 34% a decade ago, according to a March report from the Investment Company Institute, a trade organization. These accounts collectively held $16.2 trillion in assets around mid-year 2024.
That growth has been fueled by employer retirement account rollovers, such as 401(k) plans, with nearly 60% of pretax traditional IRAs including rollovers in 2024, the report found.
With trillions of wealth in IRAs, investors need to stay organized with beneficiary designations, which can easily be overlooked when you have multiple accounts, Buckingham said.
The ‘worst beneficiary’ for your IRA
If you don’t name a beneficiary for your IRA, the default is usually your estate, Buckingham said.
“The worst beneficiary you can ever have for a retirement account is the estate, whether it’s on purpose or by default,” he said.
If you name a beneficiary, the account is payable to the heir upon death. But without a beneficiary, the assets go through probate, a legal process to settle the estate after death — which can be costly and time-consuming, Buckingham said.
In the meantime, income to the estate from the IRA is subject to a “very compressed tax bracket” because it hits the 37% rate once earnings exceed $15,650 for 2025, he said. By comparison, a married couple filing jointly reaches the 37% income tax bracket around $750,000 of taxable income for 2025.
Another issue is that an estate-owned IRA must be emptied within five years, Buckingham said. Typically, non-spouse heirs have 10 years to deplete inherited IRAs, which provides more time for tax planning.
