We create IRAs and retirement plans to provide income during our retirement years, but we also expect that on our deaths our loved ones will inherit a sizable sum of money from the IRA or the retirement plan. Everyone knows or should know that the proper way to transfer IRA and retirement plan assets on the death of the IRA owner or plan participant is by a beneficiary designation.
I believe that IRA owners and retirement plan participants should do more than simply complete a beneficiary designation form. They should also educate their adult beneficiaries about fundamental IRA concepts to prevent them from immediately cash out the inherited IRA or plan and blow the money on an expensive car or other foolish expenditures.
Forbes has a great article called “Five Rules For Inherited IRAs” that is a must read article for anybody whose IRA or retirement plan may leave substantial assets to loved ones. The article begins:
“Before they inherited $3 million in retirement accounts from their father last year, the three middle-aged siblings didn’t know it was possible for heirs to stretch out the tax benefits of such accounts for decades. But what they also discovered after his death is that doing this is tricky–and in some cases impossible–if the original owner of the accounts didn’t fill out his beneficiary forms just so. Although their 78-year-old dad was a lawyer, “He may never have realized that it made any difference,” says a daughter, who has spent days trying to sort it all out.”
The five rules are:
- Do no harm
- Beneficiary forms rule
- Employer plans are different
- Spouses have more options
- Watch for distribution traps
I recommend you read the article, make a copy of it for your records, give a copy of the article to all of your adult beneficiaries and keep a copy in the file where you keep your estate plan documents or your IRA or retirement plan documents.