Accumulating wealth for retirement is a basic goal of every investor. For many people, the vast majority of their retirement wealth is contained in a tax deferred or tax free investment vehicle. In fact, it is not at all uncommon to run across a couple with 80 to 90% of their entire networth in either 401(k)s, IRAs, Roth IRAs, or some combination of the three. Furthermore, many of these diligent savers go to great lengths to ensure that they maximize their tax-deferred contributions and invest those assets as prudently as possible to maximize wealth in retirement. Why then do so many investors fail to fill out even a few of the most basic estate planning documents to ensure that their nest eggs are used as intended in life, and make it intact to their loved ones upon the investor's death?
One quick example of the latter instance (passing assets along to the next generation) should suffice to show the importance of making sure you do the paperwork. The beneficiary form is easily the single most important estate planning document when dealing with IRAs and Roth IRAs. The beneficiary form controls who will get the investment portfolio and how long they will be able to keep it. What a shame if your loved ones don't get assets intended for them or can't take full advantage of the tax deferred feature of an IRA, or tax free feature of a Roth. Yet it happens all of the time because people fail to fill out a simple beneficiary form, instead relying on their will to take care of the distribution of assets after their death. Here's the problem though!
An individual who inherits an IRA without being named on the beneficiary form will not be considered a designated beneficiary, and that makes a HUGE difference. (An estate has no life expectancy and is never a designated beneficiary even when it is named as the default beneficiary, which is common in plan documents) Inherited IRAs and Roth IRAs must be emptied within 5 years of the death of the owner if the owner dies before the Required Beginning Distribution (RBD) date (always the case in a Roth since there is no RBD). Think about what that little oversight - not filling out a beneficiary form - just cost your heir! Rather than being able to allow assets to continue to grow tax-deferred for decades longer, your heir will be forced to empty the IRA - AND PAY INCOME TAX - no later than 31 December of the fifth year following your death. It's even worse when dealing with a Roth IRA since assets in a Roth can be held tax free and allowed to compound for decades as the beneficiary stretches out tax-free distributions over their lifetime, making for a considerably larger ultimate transfer of wealth between generations.
Failure to fill out a simple beneficiary form for your IRA or Roth IRA is just one example of an estate planning oversight that can cost your family dearly. Take a few minutes to review your beneficiary forms to make sure it doesn't happen to you. And then take some time to review your other estate planning documents as well....
