Overlooking beneficiary designations is a big IRA mistake: attorney
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LAS VEGAS – Experts warn that millions of households have individual retirement accounts and simple mistakes can be costly.
One of the most common IRA mistakes is overlooking beneficiary assignmentsThat’s what determines who gets the account after you die, according to Brandon Buckingham, vice president of the advanced planning group Prudential Retirement Strategies.
Speaking at a meeting of the Financial Planning Association, Buckingham said it was “the biggest mistake people make”. annual conference on Tuesday. Some investors do not name a beneficiary or leave an outdated heir. The latter is particularly problematic, he said, because beneficiary names override those specified in your will.
“I can’t tell you how many times I’ve seen an ex-spouse inherit an IRA or 401(k) account,” Buckingham said. “This happens all the time.”
By mid-2024, about 58 million The rate of U.S. households, or about 44%, own an IRA, 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 in mid-2024.
This growth was driven by employer retirement account rollovers, such as 401(k) plans, with about 60% of pre-tax traditional IRAs, including rollovers in 2024, the report found.
Because of the trillions in wealth in IRAs, investors need to be organized with beneficiary designations, which can be easily 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 have for a retirement account is property, whether by design or default,” he said.
If you name the beneficiary, the account is paid to the heir upon death. But without a beneficiary, assets go through probate, a legal process for settling inheritance after death, which can be costly and time-consuming, Buckingham said.
Meanwhile, property income from an IRA is subject to a “very compressed tax bracket” because it reaches a 37% rate when earnings are earned. exceeding $15,650 He said for 2025. By comparison, a married couple filing jointly hits the 37% income tax bracket on approximately $750,000 of taxable income for 2025.
Another issue is that the IRA on real estate property must be emptied within five years, Buckingham said. Typically, non-spousal heirs have 10 years to exhaust inherited IRAs, allowing more time for tax planning.
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