If you have assets like retirement accounts, you will have to select primary and contingent beneficiaries to assume your assets in the event that something happens to you. Having beneficiaries allows them to receive your assets without having to go through the probate process, which includes reviewing the will via court system.
The primary beneficiary(s) on the account will be the first in line to receive your financial assets, but if they are unable to manage the assets due to medical reasons, then the responsibility will fall on the contingent beneficiary(s). You can designate as many as you need, so choose your beneficiaries appropriately.
When designating beneficiaries, you should consider the responsibility that comes with the inheritance when you’re gone. Things like taxes, age restrictions, and more can all play a role in how your beneficiaries are selected and how they can manage the accounts.
Read on to learn how to designate beneficiaries, the workload that comes with the financial inheritance, and other helpful resources.
When selecting beneficiaries for your accounts, you should consider age, ability, and relation. Most people choose a spouse, sibling, or children as their primary beneficiaries, but the choice is ultimately yours. Consider the below before choosing your beneficiaries:
- Age: Minors are restricted from inheriting the assets of a retirement account. If a minor is selected, the court will require a guardian or assign a guardian to oversee the assets until the beneficiary is old enough to inherit and manage the funds.
- Familial Status: If you have family or in-laws on your list of beneficiaries, it’s important to review your documents regularly. In the case of new marriages, divorce, children, etc., you may want to make adjustments.
When selecting your primary and contingent beneficiary(s), make sure you consider their ability as well. Someone who is finically stable will be able to manage your funds easier than someone who is a careless spender. Also, consider medical ability. Are they mentally stable? Physically and emotionally able? Are there medical reasons that would prevent them from managing money appropriately? Make sure you consider these things before making your beneficiary selections.
If you have special circumstances, such as underage beneficiaries like children or grandchildren, or need additional options for your beneficiaries, consider the below.
- Trusts: To avoid the use of guardians and the court system, you can set up a trust in the underage beneficiaries’ names. This option allows you to determine how old the beneficiaries have to be in order to receive the funds in the trust, which gives you more control of who can access your assets.
- Per Stirpes Option: This is an option for people who designate 100% of their retirement assets to one person, such as a spouse. The per stirpe option ensures that if your primary beneficiary precedes you or passes at the same time as you, then their benefit would then be divided equally amongst other primary or contingent beneficiaries.
- The 10-Year Rule: Once you’re gone, your beneficiaries are subjected to the 10-Year Rule for withdrawals. This means that your beneficiaries can choose when and how much to withdraw from the accounts if the balance is $0 by December 31 of the 10th year following your passing.
- Notify Beneficiaries How to Collect: In the event of your passing, your beneficiaries will need to trigger the collection. Make sure they’re aware of who manages your assets and how they will receive them. The designated primary beneficiary will need to make a claim with the company that manages your accounts before moving forward with the process.
If you’re unsure of which options are best for you, speak with a financial advisor about your accounts. Together, you can determine the best way to manage and allocate your funds when you’re gone.
Taxes on Inherited Accounts
Taxes are always a consideration when it comes to financial management. The Secure Act determines the rules and regulations that a beneficiary is subjected to.
The 10-Year Rule requires beneficiaries to pay income tax on the funds that are withdrawn from the account. In some cases, the withdrawals may put the beneficiary into a higher tax bracket, but the 10% early withdrawal penalty is waived in the event of an inheritance.
Beneficiaries also have the option to rollover inherited IRA funds into another IRA but will be taxed on any amount that is withdrawn from the account at any time.
Speak with your financial advisor regarding the tax advantages and disadvantages prior to designating your beneficiaries.
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