Updated: Dec 20, 2021
We can all learn from other’s mistakes. And in the world of complicated IRA taxation, it’s not hard to make one. Know that IRA’s and 401k’s are fully taxable to your heirs. And while a well-laid plan lets your heirs pay that tax a little at a time, a poorly designed plan could end up costing them 40% of their inheritance in taxes. Which would you prefer? Here are the most common mistakes I see in my practice:
Not naming primary AND contingent beneficiaries on your IRA’s. This robs your estate of important distribution options that could save tens of thousands in income taxes. As a side benefit, proper beneficiary designations keep the IRA funds from being used to settle your final debts.
Not having updated beneficiary information. It’s important to think of your beneficiary designations as the “will” for your IRA. For example, if you forget and leave your ex-spouse as primary beneficiary, but update your will to leave everything to your kids, guess who gets the IRA?
Not communicating with your intended heirs. So you’ve done your homework and have a well-executed financial and estate plan in place. But at your passing, your unsuspecting children learn they’ve inherited an IRA so they have the IRA added to their own IRA. WRONG! They’ve just triggered tax on the entire distribution. Don’t assume your adult children or spouse understand inherited IRA tax rules – leave a note with your will telling them to talk to a qualified tax advisor before they do anything.
Other common mistakes I see:
Naming a trust as an IRA beneficiary – a really bad tax answer 99% of the time.
Your heirs missing the year-of-death required distribution, resulting in a 50% penalty.
Not knowing there are different options available for a spouse inheriting an IRA versus a non-spouse.
Not knowing that inherited Roth IRA’s have Required Minimum Distribution rules
And the list goes on… bring a friend and join me at our next Lunch ‘n Learn where we will look at more IRA mistakes to avoid, plus take a deeper dive into inherited IRA rules. You can learn simple steps to take now which will help your heirs in the future. Or call today to set up your complimentary one-hour consultation with me, where we can review your unique tax situation together.