CONTRIBUTED CONTENT: Your IRA is not covered by your will — here’s what that means for your family

For some Idaho families, the largest financial asset they own isn’t the house. It’s the retirement account. A 401(k) built over decades. An IRA rolled over from a previous employer. Sometimes several accounts across a career. These balances can easily reach six figures — or well beyond.

What surprises most people is this: your will has no control over who receives that money. Retirement accounts pass to whoever is named on the beneficiary designation form for your retirement account — full stop. If that form is outdated, blank, or names someone you’d no longer choose, your carefully written will (or trust) cannot override it.

The Rules Changed — and Many People Don’t Know It

Beyond the beneficiary designation issue, the rules governing inherited retirement accounts changed significantly with the SECURE Act of 2019 and subsequent IRS guidance. If your estate plan — or your expectations about how your children will handle an inherited IRA — was built on older assumptions, it may need a second look.

Under prior law, a non-spouse beneficiary (think: your kids) who inherited an IRA could “stretch” distributions over their own lifetime, keeping most of the money growing tax-deferred for decades if they chose to. That option is largely gone. Today, most adult children who inherit a retirement account must withdraw the entire balance within 10 years of the original owner’s death. Those withdrawals are taxable income at the time of the withdrawal.

That 10-year rule has real consequences. A child who inherits a $400,000 IRA in their peak earning years may find themselves pulling $40,000 or more per year in forced distributions — on top of their regular income — and paying taxes at a rate far higher than their parents ever did.

And although I will continue to refer to inherited IRAs here, know that in most instances, these same rules will apply to inherited 401(k)s – though often inherited 401(k)s are converted into inherited IRAs due to administrative rules.

Spouses Play by Different Rules

A surviving spouse still has significant flexibility. They can roll an inherited retirement account into their own IRA, delay distributions, and generally continue the account as if it were their own. This is one reason keeping a spouse as the primary beneficiary usually makes sense — but it’s worth being intentional about who comes after them as the contingent beneficiary.

Common Mistakes Worth Avoiding

A few patterns come up repeatedly in this area:

• Naming a minor child as beneficiary. A child cannot directly inherit a retirement account. A court-appointed guardian will manage the funds until the child reaches adulthood — a process that’s expensive, slow, and public.

• Naming your estate as beneficiary. This routes the account through probate and eliminates the 10-year stretch, compressing distributions and accelerating the tax hit.

• Forgetting to update after a divorce. In some cases, federal law requires a former spouse to disclaim the account before a new designation takes effect. Don’t assume a divorce decree signed by a judge is enough. Those decrees are often the starting point and include language from the judge ordering you (the divorcing parties) to complete the necessary follow up to put the decree into action concerning retirement accounts. Talk to your divorce attorney to be sure all follow through has been completed by both ex-spouses.

• Never naming a contingent beneficiary. If your primary beneficiary predeceases you and there’s no contingent named, the account may fall back to your estate by default (and if you used a living trust to avoid probate – this failure to name a contingent beneficiary on your retirement account will mean your estate has to go to probate even though you had a trust!).

What You Can Do Now

Start by pulling the beneficiary designation forms for every retirement account you own. Your plan administrator or HR department can provide copies. Review them against your current family situation and wishes. If anything looks off — an ex-spouse, a deceased parent, a blank contingent line — update it. Not sure who you should be naming as beneficiary beyond your spouse? Talk to your estate planning attorney and your financial advisor. Make sure the beneficiary designations are properly coordinated with your other estate planning to get the correct intended outcome. There are no one-size fits all solutions here. Some of my clients need to name their living trust as their contingent beneficiary, while others need to name their children directly. Talk to your professional advisors to know what you need to do.

Beyond that, if you have a substantial retirement account and adult children who will likely inherit it, you can encourage your children to speak to their CPA in advance about how they will want to approach the income tax issues that this aspect of their inheritance will create. The 10-year rule creates planning opportunities — Roth conversions, strategically timed withdrawals, charitable strategies — but only if they plan.

Retirement accounts represent a lifetime of work. With a little attention now, you can make sure that money reaches the right people — and doesn’t hand them an tax burden they weren’t prepared for.

My law firm is currently offering free telephonic, electronic, or in-person consultations concerning probating estates or creating estate planning documents.

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Robert J. Green is an Elder Law, Trust, Estate, & Guardianship Attorney and the owner of Kootenai Law Group, PLLC in Coeur d’Alene. If you have questions about estate planning, probates, wills, trusts, powers of attorney, guardianships, Medicaid planning, or VA Benefit planning, contact Kootenai Law at 208-765-6555, [email protected], or visit www.KootenaiLaw.com.

This has been presented as general information and not as legal advice. Do not engage in legal decision-making without the advice of a competent attorney after discussion of your specific circumstances.