Most IRA owners, if asked what their major IRA concern was, would tell you it’s protecting the account from losses. Naturally, if you have $500,000 in your IRA, you are probably worried about losing it in a down market. However, there is a problem much simpler that folks keep missing which could cost your family thousands of dollars.

What is that problem? It’s the beneficiary form. Why would the beneficiary form cause so much trouble and cost so much? Because of the complexity of the laws surrounding the beneficiary designation and the lack of knowledge of most investors (and unfortunately financial advisors) concerning this topic.

First off, the beneficiary designation feature can be an attractive tool. One shouldn’t think that it is bad — quite the contrary, it’s rather helpful. For example, by definition, a beneficiary form bypasses probate. Why is this good? Well, if you’d like your money to go directly to your family at your death and potentially not be subjected to the costs and traps of probate, then this form could accomplish that for you.

So where is the problem? The problem lies in the manner in which many people fill out this form. Oftentimes, people have multiple IRA accounts — frequently scattered in various CD’s, annuities, brokerage accounts, etc. I find typically that clients will have varied beneficiaries designated. For example, your mother is on your CD IRA, your spouse is on your annuity IRA, and your father who passed away is the beneficiary on the brokerage IRA account. This is uncoordinated and many times leads to unintended consequences. You may have put certain wishes in your will, such as wanting certain relatives to receive certain amounts of your assets. However, if your beneficiary form doesn’t match your will, take a guess which document is likely followed — the beneficiary form. Even if your will says not to leave any money to a certain individual — if that person is listed as a primary beneficiary, then that person is very likely going to get their designated share.

Additional Problems

What other problems are there? If someone named as a primary beneficiary predeceases you, and there are no contingent beneficiaries listed, then you could have a big problem. The IRS says the money must be out of the account by December 31st of the fifth anniversary year of the decedent’s death. This could accelerate the taxation of your IRA money and this may mean your children would lose the benefit of the stretch IRA tax deferral — a key tax planning technique. This is especially painful and costly if you have a sizable IRA.

What should you do then about your IRA to try to prevent these issues? One solution you may want to consider is consolidating your IRA accounts and creating a retirement asset will to be filed with your IRA custodian. This may allow you the detailed planning you require to take care of your family best.

The bottom line is that if you do own an IRA with sizable assets, then you want to avoid careless mistakes in your planning.