If you are like most people, you have a retirement account to help cover your expenses after you stop working. And, if you are like most people, you probably intend to spend that money yourself.

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As we all know, though, you can’t predict the future. Sorry to be all dark, but there’s a chance that you will pass on before you’ve used any or all of the funds in the account. For that reason, you’re required to designate a beneficiary for your retirement accounts. But naming a beneficiary isn’t the end of your responsibilities when it comes to estate planning and writing a will. You have a number of important decisions to make and ongoing responsibilities to ensure that your money goes where you want to go.

Unfortunately, many people make mistakes that cause their retirement accounts to be awarded to the wrong person. Or their money ends up being tied up unnecessarily. Understanding your responsibilities can prevent this from happening.

Mistake #1: Thinking that Your Will Covers Everything

When you draft your last will and testament and divvy up your property, you’ll probably include a provision for your 401k or IRA. However, the official beneficiary designation on the account will supersede anything you put in your will, regardless of your current relationship with the official account beneficiary.

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In other words…if your former spouse is listed as the beneficiary on your account, it doesn’t matter if your will says to give the money to your current spouse, your children, or even a charity. For that reason, it’s important that you stay on top of your beneficiary designations, and make changes as necessary. And remember: By law, a company-sponsored 401k account automatically goes to a spouse regardless of the will, unless the spouse has signed a form waiving his or her right to the account. If you want your money to go elsewhere, rolling it over into an IRA plan allows more flexibility.

Mistake #2: Leaving an IRA Account to Your Estate

Some people try to avoid the issue of divvying up retirement accounts altogether by designating their estate as the beneficiary instead of a particular individual. This is not a smart move for a bunch of reasons. Without a designated beneficiary, the IRA custodian (the company with which it is held) will determine who gets the account.

In most cases, that is the surviving spouse, but some custodians have been known to split the account between the spouse and the estate. If you’ve got someone in particular in mind that you want to receive the money, be sure to name that person as a beneficiary specifically.

Mistake #3: Not Investigating Trusts

Leaving your retirement account to a trust can help maximize the value of the account, and help you place restrictions on how/when the money can be used. Trusts are especially helpful when you are leaving the account to a minor, who may not make the soundest decisions about how to spend the money.

In addition, by placing the money in a trust, you can avoid some tax consequences and required disbursements, allowing the money to grow and providing an income for your loved ones for many years to come A trust isn’t necessarily right for everyone, and the rules are complex, but in some cases, they can help protect your assets and ensure they are disbursed according to your wishes.

Mistake #4: Failing to Understand the Tax Rules

So, Federal law requires that beneficiaries take a minimum disbursement before December 31 of the year they take ownership of the account. This means that the beneficiary will have to pay taxes on that money. However, there are some ways to lower the tax burden on your beneficiaries. Spouses can roll over the money into their own IRA accounts, and put off disbursements until they turn 70 and a half.


Other heirs don’t have the rollover option, but they can stretch out the disbursements based on their own life expectancy. The younger the beneficiary, the lower the amount they must withdraw, and the lower the taxes they pay. Stretching out disbursements also allows the account to grow for a longer time — increasing its long-term value. These rules are important to understand when deciding on beneficiaries; in most cases, the younger the beneficiary the better if you want to maximize your asset.

The rules surrounding estate planning and retirement accounts are kind of complex, we know. But with smart planning, you can actually provide for your loved ones long after you pass away. This post was definitely somewhat dark, but this is important stuff. Avoid the common pitfalls, and your estate distribution will go smoothly. Ensure that your money goes where you intend for it to go.

To learn more, head on over to Wall Street Survivor.


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