IRA Beneficiary Designations

IRA Beneficiary Designations

understanding your IRA Beneficiary designations

Beneficiary designations are meant to be a simplified way to ensure that your IRA plan will be paid out according to your wishes in the event of your death. A properly executed designation form allows the beneficiaries of the IRA to claim their share of the account by simply providing proof of their identity and providing a death certificate for the IRA holder. However, there are some misconceptions about beneficiary designations that can derail your best intentions.

5 items to consider when designating a beneficiary on your IRA:

  1. Your IRA beneficiary form should be reviewed and updated after every major life change, such as divorce or remarriage, the births of children, or if any of your named beneficiaries pass away before you. It is always in your best interest to keep these forms current and valid. Retain copies of your beneficiary designation forms, so your executor or beneficiaries, upon your death, can access them.
  2. It is important to understand your Will may not control who receives the funds from your IRA. If your Will and IRA beneficiary form contradict each other and your Will names one person as the beneficiary and the IRA designates someone else, the IRA beneficiary form can override the stipulations in your Will. For example, if you were to get remarried and change your Will, but forget to update your IRA beneficiary designation, the person named on your IRA beneficiary form (possibly an ex-spouse) may be entitled to your assets in the event of your death, instead of whoever was named in your Will.
  3. A per capita beneficiary designation specifies that if an IRA holder names multiple primary beneficiaries and one of the beneficiaries passes away, the funds will pass to the remaining named beneficiaries upon the IRA holder’s death. The funds will not pass to the heirs of the deceased beneficiary. Capitol Federal® pays IRA funds to the beneficiaries on a per capita basis.
  4. If a trust is named as a beneficiary of an IRA instead of the IRA holder’s spouse and the IRA holder then passes away, the IRA funds will be transferred to an Inherited IRA under the name of the trust. The spouse cannot assume those funds and transfer them into their own IRA plan, even if they are the beneficiary of the trust. Naming a trust as a beneficiary can create unexpected withdrawal and/or tax requirements for your heirs. Before naming your trust as a beneficiary, we recommend consulting a tax professional or attorney.
  5. Many times, in order to try to simplify the beneficiary process, an IRA holder will name just one of the children as the beneficiary instead of all of their children. If this occurs, only the named beneficiary will receive the IRA funds which could create an unintended misunderstanding:
    1. It may have been expected that the funds would be distributed to the other siblings, however the receiving beneficiary is not required to do so.
    2. The other siblings may believe that this was the IRA holder’s intention and that may or may not have been the case.
    3. In the end, this could actually create burdensome tax requirements for the beneficiary that did receive the funds. In actuality, the funds may not have been distributed as the IRA holder had intended.
    4. If a minor is named as a beneficiary, they are not allowed to control the IRA funds. The parent will be required to go to probate court and be appointed as a conservator to manage the IRA on their behalf until the child reaches the age of majority.

Completing your IRA beneficiary designation form correctly is a critical part of your estate planning and should be completed with the direction from a knowledgeable attorney. Capitol Federal does not offer legal or tax advice.

It is always a good idea to periodically check to make sure all of your beneficiary designations are up to date. Contact us anytime to verify or change your beneficiary designation.

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