Ten Stupid Things People Do To Mess Up Their IRA’S

1. Not getting professional advice. The complexity of the rules governing IRA distribution and beneficiary designations is incredible. Especially where substantial amounts of money are involved, don’t try to “do-it-yourself.” Who to name as beneficiary? When to take distributions? How much to take out? Should you use a trust? Is it best to name your spouse? These are complicated issues. Lawyers, accountants, and other financial professionals spend hours learning the complex rules that govern these areas. Don’t try this at home.

2. Not naming beneficiaries . When you set up an IRA or become a participant in a retirement plan, you don’t have to name a beneficiary and many people don’t. Sometimes an IRA owner may designate one beneficiary, the spouse, and leave it at that. Usually plan documents provide that if no beneficiary or contingent beneficiary is named, the IRA is payable to the owner’s estate. This may be the worst possible result from an income tax point of view.

3. Naming the wrong beneficiaries. Don’t name your minor kids as beneficiaries. If your 7 year old is the beneficiary of your retirement plan, the company will not pay it to him. It will be necessary to go to the expense and inconvenience of having a court-appointed guardian for the minor who will get custody of the minor’s estate, including the retirement plan assets. In your will, you wouldn’t give your property to your 7-year old. Why would you give your retirement plan to him? You need to name a custodian or a trustee.

Even if your kids are adults, fashioning the beneficiary designation is complicated. If a child predeceases you, does his share go to his children? Are they minors? Or does the retirement plan provide that if a beneficiary is deceased, his or her share is divided among other named living beneficiaries?

Don’t automatically name your spouse. The best tax deal may be to name your adult children, or even adult grandchildren, or a trust for grandchildren, because they will be able to maintain the tax deferment provided by the IRA or retirement plan for a much longer time.

More to come next week. Stop by to learn more.