Choosing a Beneficiary for your IRA – Primary and Contingent
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[0:14] What does it mean to have a beneficiary for an IRA?
[0:32] What is the difference between a primary and contingent beneficiary?
[1:09] Make sure to let your beneficiary know who they are.
[1:52] What information do you need in order to list beneficiaries for an inherited IRA?
[2:16] What’s the difference in beneficiary IRA for spouse or non-spouse?
[2:41] Here’s what your spouse needs to do if they aren’t the primary beneficiary.
[3:10] Keep this percentage rule in mind when listing beneficiaries.
[3:42] Why does the IRA beneficiary designation have to add up to 100 percent?
[4:18] What if you have more than 3 beneficiaries?
[5:09] You can send in the beneficiary information as long as you have these things listed.
[5:30] What if your IRA beneficiary changes?
[5:59] This is the form you need to change information about your beneficiaries.
[6:32] How often should you update the information?
[6:57] Here are the main 3 points you should consider, as well as where to go if you have any other questions.
Choosing a Beneficiary for your IRA – Primary and Contingent
What does it mean to be the beneficiary of an IRA?
The beneficiary to the IRA is the person that will inherit your IRA when you pass away.
Primary Beneficiaries vs. Contingent Beneficiaries
Primary beneficiaries are first in line for the inheritance, whereas contingent beneficiaries are second in line for the inheritance. For instance, if the primary beneficiary has died before the IRA holder, and the accountholder hasn’t updated his beneficiary information, then the inheritance would consequently be passed on to the contingent beneficiary. Another example would be: if the primary beneficiary disclaims or relinquishes the inherited IRA, for one reason or another, then the IRA would be passed on to the contingent beneficiary.
Note: Limit the confusion: tell your beneficiary that you’ve named them as beneficiary to your IRA. Otherwise, how would they find out if they’re a beneficiary of your IRA?
What Happens if an IRA has no Beneficiary?
If there are no beneficiaries named, the account will be sent to the account holder’s estate, which may, or may not, create other issues.
Naming Beneficiaries for your IRA – IRA Beneficiary Designation Form
On the application form, toward the bottom, in the left column you will see a spot for three beneficiaries. To the left of the beneficiaries information, you’ll see two dots that say “Primary” and “Contingent”. Fill in the dot to indicate the type of beneficiary.
Note: We need at least one primary beneficiary who will collect 100% of the IRA or multiple primary beneficiaries, where the sum of the beneficiaries equals 100%. We cannot distribute more or less than 100% of the account.
In the beneficiary designation form, we need some basic information about your beneficiaries; name, address, city, state, and zip code. We also need the beneficiaries’ social security number and date of birth for reporting purposes once they have assumed the account as their own.
The last two blanks are for your relationship with the beneficiary and the share percentage. The relationship section allows us to know who we are dealing with and gives us just a little insight into the bigger picture.
IRA Beneficiary Designation Form Required Information:
- At least one, and up to three, named primary beneficiaries
- Optional: at least one, and up to three, named contingent beneficiaries
- If more than one primary beneficiary is named, a percentage must be allocated between the named beneficiaries, where the sum is exactly 100%
- If more than one contingent beneficiary is named, a percentage must be allocated between the named beneficiaries, where the sum is exactly 100%
- Beneficiaries’ basic information: name, address, city, state, zip code, social security number and date of birth
- Relationship to the IRA account holder
IRA Beneficiary Spouse Rules
If the beneficiary is not the spouse of the account holder, then you will need to read the last section of the application and have your spouse sign; recognizing the rights of the named beneficiaries.
For example, if for whatever reason I wanted to leave my IRA to my three boys instead of my wife, then I would assign my three boys as beneficiaries with 33.33% each and I would have my wife sign the “Spouse’s Consent” section of the application.
The share percentage informs us how to split the account between the appropriate beneficiaries.
For example, in the previous example, I would leave each of my three sons with 33.33% of the account. It is important that the percentages equal 100%; otherwise, there could be confusion and problems later down the road.
Note: The total of all the primary beneficiaries percentages must equal 100%. And all of the total contingent beneficiaries percentages must equal 100%.
Oftentimes, clients will have three primary beneficiaries and three contingent beneficiaries, or more. The application only has spots for three beneficiaries. If you need room for more primary or contingent beneficiaries, then you can use the “IRA Beneficiary Designation” form. This form gives you an extra five places to name beneficiaries. Submit the IRA Beneficiary Designation form with the application, or you can simply type the beneficiary information out on a separate sheet of paper, sign it, and submit it along with the application. Just be sure to include the correct information to avoid delays.
How to Change Beneficiary on an IRA
Making changes to your beneficiaries information is easy. On our website, we have an IRA beneficiary change form called “Change of Name, Address, or Beneficiary to IRA Account”—long name, but an easy concept to utilize. Use this form any time you need to change information pertaining to the beneficiaries of the account. A million things can happen between now and your retirement; the point here is that your beneficiaries and their information aren’t set in stone. You can change them at any time and you should keep them updated as often as possible.
My three big takeaways from today would be:
Let your beneficiaries know that you’ve named them as such.
Make sure the custodian has accurate, updated beneficiaries information.
Be sure that the share percentages are equal to 100% for both the primary beneficiaries and the contingent beneficiaries.
Today, we’re going to talk about beneficiaries and I just thought the first thing to do would be go all the way back to the basics and explain what a beneficiary is.
What a beneficiary is when you set up a self-directed IRA account, you’re going to be asked on the first page of the application to write who your beneficiaries are and that is the person that is going to inherit this account when you pass away.
You have what are called primary beneficiaries, which are the first ones in line. And then you have contingent beneficiaries. What that means is that if your primary beneficiaries pass away before you do and you don’t make new primary beneficiaries, it’ll instead go to the contingent beneficiaries or if a beneficiary, a primary beneficiary chooses that they don’t want the inheritance, they can allow that to pass them and go on to the contingent beneficiaries. It’s just the person that’s going to receive your IRA account when you pass away.
What I’ve said many times before is be sure that your beneficiary knows that they are the beneficiary. We’ve talked about that before, so I think that’s very important.
On the first page of your application, you’ll see down on the left side near the bottom, there are spaces for three people to be put in as beneficiaries. And to the left of that, there’s a little circle that says primary or contingent. You would check whichever box is applicable. You need at least one primary beneficiary, so that your account will go to that person 100%. If you don’t have a beneficiary, then your account ends up going to your estate. There may be some other issues with that that you need to talk to a lawyer about.
We ask for the name of the beneficiary, the address of the beneficiary, city, state, zip, and their social security number (which is very important for us because we’ll have to do some filing and stuff when they take over the account). We need their date of birth because they will then have various opportunities because on how they take the accounts. We’ve talked about that before. They could take it over their lifetime. If they’re a spouse beneficiary, then they can treat it as their own account. If they’re not a spouse beneficiary, they can take it all at once, they can take it over five years, or they can take it over their lifetime.
The other two important things are we asked you the relationship. We like to know what that is so we know who we’re dealing with. It doesn’t have to be a family member, but many times, it is. It’s important that if it’s not a spouse, then there’s a place on the right-hand side of the form at the bottom where the spouse has to sign acknowledging that they know they’re not the beneficiary.
A situation there might be if I wanted to not, for whatever reason, leave my IRA to my wife, but I wanted to leave it to my three boys, then I would have to have my wife sign this form acknowledging that she knew that’s what we had done.
Another very important thing is at the bottom of the information that you have to provide for each beneficiary is a share and a little percentage sign. That means if I have more than one beneficiary – if I’ve only got one, it’s my wife, I would put a hundred there, so a hundred percent of my IRA goes directly to my wife. If I’ve got my three boys as contingent beneficiaries or even as primary beneficiaries, or if we chose to skip my wife for one reason or another, then I would have 33.33%.
All of the percentages for the primary beneficiaries have to add up to 100%. It can’t be less than 100%, it can’t be more than 100% because if it ends up being less, then that’s confusing to us. Who gets what’s left over? If it’s more than 100%, we can’t give you more than 100% of what you have in your account. It’s very important that you’re careful and that all of the primary beneficiaries added together equal 100% and that all of the contingent beneficiaries added together equal 100%. That’s what you fill out on the application when you set up a new account.
The other thing to keep in mind – well, there are actually two things to keep in mind. If on the application, you have a place for three beneficiaries, if you have more beneficiaries than that or you have three primary (let’s say you have three primary beneficiaries) and then you want to let us know about your contingent beneficiaries, in our forms on our website, we have an IRA beneficiary designation form.
You could get that form and there’s a part of it that says ‘designation of beneficiary’. You can check ‘in addition’. “These are in addition to existing beneficiaries listed on the beneficiary designation completed on ___________” and insert the date (so that would be the date of your application). And then you can use this form to put additional beneficiaries or additional contingent beneficiaries. That’s something important if you have more than what will fit on your application.
You can also just give us that information on a piece of paper. Just make sure you give us name, address, city, state, zip, social security number, relationship, date of birth and percentage share that they get.
That would be on this form in the event that not all the beneficiaries that you had could fit on the front page of your application.
The next thing to keep in mind is what if my beneficiaries change for one reason or another? What if I had some primary beneficiaries and things change and maybe I want to skip them for one reason? Say, I have my kids as beneficiaries, but then my kids are doing well, they don’t really need the money, so I would like to skip them and give it to grandkids for education purposes. Then you would get the form that’s called the ‘Change of Name, Address or Beneficiary to IRA Account’.
You would then fill out form saying, “I’m changing the name, I’m changing beneficiaries” and you can do that or you’d also use that form if the beneficiary just moved. For instance, if Dustin were one of my beneficiaries, he moved to Dallas a few months ago, I would need to get this form and change the address that Sunwest Trust has for him, so that they would know where to contact him when the time comes for him to inherit part of my IRA.
This change of address beneficiary form information is something you probably should look at like you do changing the batteries in your smoke alarms; look at it once a year. Maybe a good time of year is to look at it at tax time or maybe a good time is to look at it when you’re giving us the new market evaluations because you’re going to be sending forms back into us. You can send that form in along with the mark evaluation and we’ll have it.
This is some good information about beneficiaries. My main point would be to let them know they’re beneficiaries, make sure we have good information, including current information on addresses and such. Make sure that the total of your beneficiaries (primary) do not add up to more than a hundred and add up to at least a hundred and the same with your contingent beneficiaries.
If you have any questions about that, I’d be happy to answer those if you’d like to put them in the comments. I’m excited to see you again next week at Tuesday at Two.
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