Retirement accounts and your will

The single most common estate-planning mistake I see: someone updates their will carefully, names new beneficiaries, signs in front of witnesses — and then their largest single asset, a $600,000 IRA, doesn't follow the will because the beneficiary form on the IRA still names their ex-spouse. The will doesn't override the beneficiary form. The ex-spouse takes the IRA.

Beneficiary designations on retirement accounts, life insurance, and TOD/POD bank accounts are independent of your will. They control. Always. Your will is for assets that don't have a beneficiary form.

What "beneficiary form rules" means in practice

If a 401k beneficiary form says "Jane Smith," the IRA goes to Jane Smith — even if your will says "everything to my new spouse Mary." The plan administrator doesn't read your will. They read the form. They cut the check.

This matters a lot because retirement accounts are usually one of the largest assets in an estate. Updating the form takes five minutes online. Failing to update it is the single most expensive estate-planning oversight there is.

Things to check:

• Old jobs. Most people forget about 401ks from previous employers. Each one has its own beneficiary form.
• Rollovers. When you roll a 401k into an IRA, the old form doesn't transfer. The new IRA needs its own beneficiary designation.
• Spousal updates after divorce. Some states automatically revoke an ex-spouse's designation; many don't.
• Life insurance. Same problem. Group policies through work often default to "the estate" if you didn't pick a person — which is rarely the right answer.

The SECURE Act changed inherited IRAs

Before 2020, a non-spouse heir could inherit an IRA and "stretch" distributions over their own life expectancy — meaning a 30-year-old child could spread an inherited IRA's tax-deferred growth over 50+ years. That was a quiet but enormous tax-planning advantage.

The SECURE Act (2019) replaced the lifetime stretch with a 10-year rule for most non-spouse beneficiaries. The whole inherited IRA must be distributed by the end of the 10th year after death. There's no annual minimum during years 1-9, but the full balance has to come out by year 10 — and every dollar is taxable income to the beneficiary in the year withdrawn.

For your beneficiaries, this means three things:

1. Lump tax pain. A 30-year-old who inherits a $600k IRA from a parent has to take it out within 10 years. That's $60k+ a year of additional taxable income — likely pushed into a higher bracket.
2. Less compounding. The "stretch IRA" growth advantage is largely gone for most beneficiaries.
3. Roth conversions during your life become more attractive. Converting traditional dollars to Roth in years where you're in a low bracket means your beneficiary inherits Roth dollars (no tax on withdrawal), which protects them from the 10-year compression.

Who's exempt from the 10-year rule

Some beneficiaries — called "eligible designated beneficiaries" — can still stretch:

• A surviving spouse (still has full stretch options)
• A minor child (until they reach age of majority, then 10-year clock starts)
• A disabled or chronically-ill beneficiary
• A beneficiary not more than 10 years younger than the decedent (e.g., a sibling)

For most adult-child beneficiaries, the 10-year rule applies.

A trust as IRA beneficiary

Some people name a trust as the IRA beneficiary instead of an individual — usually for control. The trust then receives the distributions and can dribble them out to a young beneficiary or a beneficiary with disabilities. This works, but the trust must qualify as a "see-through" trust, which requires precise drafting. A poorly-drafted trust beneficiary forces the IRA to distribute under the worst-case rules (5 years for non-designated beneficiaries).

For most people, naming an individual is simpler and just as effective. Use a trust as IRA beneficiary only when you have a real reason — a minor child, a disabled beneficiary, or a beneficiary you don't trust to manage a large lump sum.

Charitable giving with retirement accounts

The most tax-efficient charitable bequest you can make: name a 501(c)(3) charity as the beneficiary on your IRA or 401k. Charities don't pay income tax. So a $100k IRA bequest = $100k to the charity. The same $100k IRA to your child = roughly $70k after federal income tax in the highest bracket. If you're going to leave money to both family and charity, the charitable share should come from the IRA and the family share should come from the rest.

What goes in your will

What's left after retirement accounts (which pass by beneficiary form) and TOD/POD accounts (which pass by beneficiary designation) and trust assets (which pass under the trust):

• Real estate not held in a trust
• Cars
• Personal property
• Bank accounts without TOD/POD designations
• Investment accounts not titled in a trust or with TOD/POD designations
• Business interests
• Anything else without a designated transfer mechanism

A well-drafted will catches all of that. But it can't reach into a 401k beneficiary form. Always check your beneficiary forms first.

The 30-minute audit

If you do nothing else this month, do this:

1. List every retirement account, IRA, life insurance policy, and bank account with TOD/POD.
2. Pull up each one online and look at the named beneficiary.
3. Update any that name an ex-spouse, a deceased relative, or "the estate."

Most people find at least one wrong designation. Some find all of them. Fixing it takes longer to log in than to actually change.