Your IRA will help you ease into retirement and supplement your income as you decrease your time on the professional clock or leave the working world altogether.  Ideally, the funds in your account will stabilize your income throughout your retirement years, but if you die while the account still has a balance, where do they go?  The answer depends on whether or not you chose an IRA-designated beneficiary.

What is a Designated Beneficiary

An IRA-designated beneficiary is the individual or individuals you choose to receive your IRA after you die. Designated beneficiaries are not exclusive to IRAs, however. You can choose a designated beneficiary for most financial accounts, including checking and savings accounts, 401(k) or other investment accounts.

You can choose one or more beneficiaries and decide how much of your account will transferred upon your death. For instance, if you have a spouse and two children, you may decide that your spouse should receive 50% and each child 25% of the IRA balance.

Primary vs. Secondary Beneficiaries

When you choose beneficiaries, you can select primary beneficiaries and secondary beneficiaries.

If you die, the balance of your IRA will transfer to your primary beneficiary(s) as indicated in your account documentation. If your primary beneficiary(s) has died or cannot be located, the account balance will go to your estate (or surviving spouse, if applicable), unless a secondary beneficiary is named.

A secondary beneficiary, also known as a contingent beneficiary, is next in line to receive the account balance.  Much like a primary beneficiary, a secondary beneficiary can be one or more people. For instance, you can choose a spouse as your primary beneficiary and a child as the secondary beneficiary. In this case, your spouse will inherit the IRA upon your death, but if they are no longer living, the IRA will be inherited by your named child.

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The Importance of Designated Beneficiary in Estate Planning

If you die without naming an IRA designated beneficiary, the account will become part of your estate and enter the probate process, where the courts decide how your property transfers. This holds up the transfer of wealth and, perhaps more concerning, can go against your wishes and cost your living relatives a lot of time and money along the way.

When you designate beneficiaries, you can bypass the probate process and ensure that your loved ones quickly receive the benefits per your wishes.

Who Can Be a Designated Beneficiary?

The IRS sets specific rules dictating who can become a designated beneficiary. This is in contrast to other types of accounts, like life insurance policies, that allow you to name nearly anyone to become the beneficiary.

IRA-designated beneficiaries can include:

  • A spouse.
  • A minor child (adopted or biological) of the deceased.
  • A chronically ill or disabled individual.
  • An individual, such as a friend or sibling, who is not more than 10 years younger than the IRA owner.

How to Choose a Beneficiary

When choosing a beneficiary,

  • Custom Beneficiaries. Naming custom beneficiaries is a straightforward process. In most cases, you can simply fill out a form designating the beneficiary and a percentage (up to 100%) of the IRA you want them to receive. However, naming a minor beneficiary can lead to compilations should you die before they reach the age of majority. In these cases, a trust beneficiary may be recommended.
  • Trust Beneficiaries. If you die and have a trust beneficiary named for your IRA, the funds will become the legal property of the trust, allowing for an easy transfer of wealth, especially when minors are involved.

Minors can’t legally inherit a fund until they reach adulthood. By opening a trust and naming a trustee, or a person to oversee the account, you can dictate how you’d like the inherited funds to be distributed. For instance, you can stipulate that the minor named in the trust cannot access funds until they graduate college.

How Inherited IRAs Impact Designated Beneficiaries

How an inherited IRA affects the designated beneficiary will depend on:

  • Their relationship to you. Spousal beneficiaries have more options, including rolling the assets into their own IRA, than non-spousal beneficiaries.
  • Type of account. Traditional inherited IRA distributions add to the beneficiary’s taxable income. Roth distributions do not.
  • RMD schedule. Both traditional and Roth inherited IRAs have RMDs, even though a standard Roth IRA has no RMDs when the original account owner is living. Generally, the schedule can be based on a 10-year method, life expectancy method or lump sum method. However, the options available depend on the beneficiary’s relationship to you and when you pass.
  • Whether or not you were taking RMDs (Spouse only). If your beneficiary is a spouse and they roll the assets into an inherited IRA, they’ll have three options:
    • Hold off on distributions until you would have reached RMD age.
    • Take withdrawals based on their life expectancy.
    • Following a 10-year schedule.

If you’re helping a beneficiary plan for an inherited IRA, or if you’ve inherited an IRA, speak to a financial professional who can help clarify the options available and which is best suited for the beneficiary’s financial circumstances.


Can I have multiple designated beneficiaries?

Yes, you can have multiple designated IRA beneficiaries as long as they are eligible under IRS guidelines. For instance, you can name a spouse as the beneficiary of 60% of your IRA and a minor child as the beneficiary of the remaining balance.

What happens if I don’t designate a beneficiary?

If you don’t name a designated beneficiary of your IRA, the balance of your IRA will enter probate after your death, allowing the courts to determine who should receive the balance of your IRA.  This can be a lengthy and expensive process that can cause unnecessary stress to loved ones.

Do designated beneficiaries override a will?

Yes, a beneficiary designation on an IRA or other financial account, like a life insurance policy, will override a will.  When you name an IRA-designated beneficiary, they become part of the contractual agreement between you and the financial entity that holds the account.