When naming beneficiaries on a retirement account, the most popular options are spouse, non-spouse individuals (including children, grandchildren, or friends), trust, will or estate, or charity.
1. Spouse. The benefit of naming a spouse as the beneficiary of your retirement plan is that, oftentimes, it can be transferred into their name for them to use as their own retirement account. In the case of an IRA, the surviving spouse has the option of transferring the funds into an IRA in their own name, giving them the same freedom as the original account holder. The same is true of most employer-sponsored retirement plans.
2. Non-spouse individual. Non-spouse individual beneficiaries cannot treat inherited IRA funds as their own. They are, however, able to move assets into an inherited or beneficiary retirement plan such as an inherited IRA. This option allows them to spread out the tax liability of their inheritance over time instead of owing taxes on the entire amount—which would be the case if they took a total withdrawal of the funds.
3. Trust. A trust can only be named as the beneficiary of a retirement account if it is a qualified trust. A trust is considered qualified if it is valid under state law, irrevocable, or becomes irrevocable when the account holder dies. It must also have identifiable beneficiaries. Speak to a competent financial advisor or attorney before naming a trust as your beneficiary.
4. Will or estate. When an account holder names their estate or their will as the beneficiary of their retirement plan, the funds are not distributed to individuals named in their will or estate. The executor would need to produce documents provided by the court in order to have funds distributed, and the court documents would be followed by the institution.
5. Charity. Naming a charity as the beneficiary is becoming a more popular option. In order to name a charity you will need to provide its name, address, and tax ID number. A 501(c )(3) organization is not subject to federal tax on contributions it receives.
As you evaluate these options, we encourage you to seek a qualified financial advisor for advice, talk with your family about these options, and pray for guidance regarding the Lord’s plan for your future.