Naming Beneficiaries to Your IRA

Dean Hanewinckel

Naming a beneficiary to your Individual Retirement Account (IRA) can be one of the most important aspects to your estate planning.  An IRA is a retirement tool that allow the earnings from the assets contained within it to grow tax deferred.  That means that any income generated within the IRA is not taxable until the owner takes the earnings out of the IRA.  This greatly helps the assets within the IRA grow at a much higher rate than investments whose earnings are taxed each year.

A traditional IRA can be funded with pre-tax money and you receive an annual income tax deduction, up to certain limits, when you contribute money to the IRA.  The assets can be left in the IRA, with the earnings tax deferred, until you are required to start taking distributions from it. Some persons who do not need to tap into their IRA for living expenses can extend the tax deferral and, with proper estate planning, can pass these savings and continued deferral on to their heirs.


First of all, it is important to know that you can and should name a beneficiary or beneficiaries to your IRA.  Failure to do so will result in your IRA being distributed to the IRA Custodian’s default beneficiary.  This is usually your probate estate.

That means that your IRA assets will need to go through probate to get to the ultimate beneficiaries.  This will cost you likely thousands of dollars of probate expenses, months of administration time and can limit the distribution alternatives for the beneficiaries.  For example, you may lose any ofthe following powerful estate planning tools:

  • The spousal “roll over” provision.
  • The ability of your beneficiaries to take distributions over their life expectancy.
  • All of these could result in higher income tax rates and possible penalties.


IRAs are subject to required minimum distribution rules to the beneficiaries after the death of the IRA owner. How and when the distributions must occur after a death depends on a number of factors including who the owner names as primary beneficiary and contingent (or backup) beneficiaries, and whether the owner dies before or after he or she begins taking lifetime required minimum distributions.

If the IRA owner has named someone other than his or her spouse as beneficiary, the beneficiary may have a few options upon the death of the owner . One of these options will generally be to take annual distributions over a fixed period of time based on the beneficiary’s life expectancy at the time of the IRA owner’s death (in some cases the period of time can be based on the remaining life expectancy of the IRA owner, if this results in a longer period of time). Young beneficiaries with long life expectancies can spread distributions over a substantial period of time, keeping the maximum amount allowable in the tax-deferred IRA.

If the IRA owner has named his or her spouse as beneficiary, then the spouse has additional options upon the death of the owner. A surviving spouse will commonly opt to roll over inherited IRA funds into his or her own IRA. Or, if your surviving spouse is your sole beneficiary, he or she may opt to simply leave the funds in an inherited IRA and treat that IRA as his or her own. With either of these options, the surviving spouse names his or her own beneficiaries. At some point, the spouse is required to begin taking lifetime required minimum distributions. When the spouse dies, the beneficiary has the option to take distributions based on his or her life expectancy.

You also have the option of naming a revocable trust as your IRA beneficiary.  Many persons are concerned that their children may not appreciate the value of tax-deferral and may cash in the IRA in one big lump distribution.  This will usually result in needless taxes and penalties.  By naming your trust as beneficiary you can retain some control as to how distributions will be taken after your death.  In some cases, a trust may not have the advantages of an individual to “stretch” out the distributions, so you will have to weigh the pros and cons of this method.

As you can see, there are many options for designating beneficiaries for your IRA.   It is well worth the time and effort to research your alternatives and name primary and contingent beneficiaries.