You Gave the Money to the Wrong Person

FAMILY UPDATE

Last week, I complained that my pets follow my wife around like they are in a parade and ignore me. One of my faithful readers gave me a great suggestion: be the one that feeds them. I've been trying it, and it's working! I got two puppy cuddles last week.

My middle son, Alex, won last weekend's 1600-meter race in track. Luckily my wife, Dalanee, is athletic. They certainly didn't get it from me.

My oldest son and I are trying out (what we call) "basic dude stuff." Last weekend we tried shooting a bow and arrow. The target was a pillow but we imagined it to be a zombie.

A tremendous amount of confusion and misinformation surrounds your beneficiary and leaving moo-lah to your heirs.

It’s time for: Dave’s Quick and Easy (and Important) Guide to Understanding Beneficiary Arrangements.

It is essential that your beneficiary arrangements match your desires, and today I am going to dispel some common misconceptions. Get ready to learn.

Retirement Accounts

On any sort of retirement account (IRA, 401k, Roth IRA, etc.), you are able to name primary and contingent beneficiaries.

Example:

IRA Account Holder: Joey Jenkins

Primary Beneficiary: 100% going to Joan Jenkins (wife)

Contingent Beneficiaries: 50% going to Johnny Jenkins (son)

50% going to Jackie Jenkins (daughter)

If Joey (husband) were to die, Joan (wife) would take possession of the retirement account assets and directly roll over the money to her own retirement account. There is no taxation on this kind of transaction.

If Joey and Joan were to die in an accident, then Johnny (son) and Jackie (daughter) would each receive half of Joey’s retirement account.

Johnny and Jackie then have two options:

Option #1– Take the money in cash. With this option, Johnny and Jackie would be required to pay taxes on their full share of the inheritance.

So if Johnny (the son) were to receive his portion of $300,000, he would then be required to claim all of that money as income on his tax return for that year. He very well could pay $100,000 to Uncle Sam in federal income tax.

Option #2- Roll the money over into an Inherited IRA. This option would allow Joey to pay no taxes for now. As he pulls money out of the account over time, he must pay income taxes, based on his tax bracket, on whatever amount he withdraws.

An Inherited IRA is a great way to stretch out the tax liability, as the beneficiary has up to ten years to withdraw the money.

Also, the 10% tax penalty does not apply to an Inherited IRA (normally you need to be 59 ½ to withdraw money from retirement accounts without penalty).

Roth IRAs pass tax-free, there is no timetable for their withdrawal, and are tax-free when the money is withdrawn.

Important Notes

You can change primary and contingent beneficiaries at any time.

If you have a 401k, by law, your spouse must be the primary beneficiary (unless they sign a waiver). This is not the case with IRAs.

Beneficiary arrangements on retirement accounts supersede your last will and testament. This is essential to understand.

If your will instructs your IRA to go to your son, and your IRA account names your daughter as beneficiary- the daughter gets the money. It doesn’t matter what the will says. The beneficiary designation trumps the will.

Non-Retirement Accounts

Now let’s move on to non-retirement assets. These include cash, savings, brokerage accounts, stocks, bonds, or anything else you possess outside your 401k or IRA. Your home and other properties would also fall under this category.

These assets fall under completely different rules.

You can have a non-retirement account "held jointly." So if one person dies, the other automatically takes full control over the account.

You can also set up a Transfer Upon Death designation (commonly referred to as a TOD). So if Joey Jenkins has a savings account titled in his name, and his desire is for the account to transfer to his daughter upon his death, the account would look like this:

Owner: Joey Jenkins TOD Jackie Jenkins.

Important Notes

A TOD designation avoids probate. The money transfers to the beneficiary immediately upon your death. Jointly held accounts also avoid probate.

You can name more than one person on your TOD instructions. You can split up the beneficiaries just like a retirement account.

In Florida, while your home can be owned jointly, you cannot place a TOD on it or any other real estate.

Setting up a trust can accomplish the same things as mentioned above, but a TOD might be simpler in many situations.

Annuities held outside of retirement accounts require you to name a beneficiary. Therefore annuities operate in a very similar fashion to retirement accounts.

Life insurance also operates under beneficiary rules similar to retirement accounts.

Wow! That was some technical (and important) information.

This info can help you avoid probate and make sure the right people get the right money.

Throughout my career, I’ve seen outdated beneficiary instructions create messy situations. I’ve even seen spouses forget to take their ex-spouses off their accounts! Don’t let your ex get your 401k!

Be Blessed,

Dave