The Art and Science of Naming IRA Beneficiaries

When it comes to retirement accounts—especially Individual Retirement Accounts (IRAs)—few decisions are more important yet more overlooked than naming beneficiaries. As a wealth advisor, I’ve seen this simple act either preserve and enhance a family’s wealth for decades… or unintentionally trigger tax burdens, family disputes, and estate complications.

The reality is, beneficiary designations aren’t just paperwork. They’re legally binding instructions that override your will or trust. In other words, the person (or entity) listed on your IRA beneficiary form gets the money—no matter what your estate documents say. That’s why it’s critical to approach this decision with clarity, precision, and a well-informed strategy.

Below, we’ll walk through how to think about IRA beneficiary designations from a planning perspective—covering tax rules, family dynamics, and long-term legacy goals.

Understand Why Beneficiary Designations Matter

Your IRA isn’t part of your probate estate. It passes directly to the named beneficiary. This can be a huge advantage—avoiding delays, costs, and public court proceedings.

However, because this process happens outside your will, a misaligned or outdated beneficiary designation can undermine even the most carefully crafted estate plan. I’ve seen cases where:

• An ex-spouse inherited the account simply because the form was never updated.

• A parent named “my children” without naming them individually, leading to legal ambiguity.

• A trust was named incorrectly, resulting in a forced lump-sum distribution and a massive tax hit.

Key takeaway: Beneficiary designations are not “set it and forget it.” They should be reviewed regularly—ideally every 12–24 months and after any major life event.

Choose Between Primary and Contingent Beneficiaries

Every IRA should have both primary and contingent beneficiaries.

• Primary beneficiary: The person or entity first in line to inherit the IRA.

• Contingent beneficiary: The “backup” who inherits if the primary has passed away or declines the inheritance.

Without a contingent beneficiary, if your primary beneficiary predeceases you, the account may default to your estate—triggering probate and losing tax-deferral benefits.

From a planning standpoint, naming both tiers provides flexibility. For example:

Primary: Spouse (100%)

Contingent: Two adult children (50% each)

This ensures the account stays out of probate, no matter the sequence of events.

Consider the Tax Implications

The SECURE Act changed the rules for IRA inheritance. Most non-spouse beneficiaries now must withdraw the full account balance within 10 years of the original owner’s death. This “10-Year Rule” compresses the tax timeline, potentially pushing heirs into higher tax brackets.

Here’s what to know:

• Spousal beneficiaries have the most flexibility. They can roll the IRA into their own, delay required minimum distributions (RMDs) until their own retirement age, and stretch the tax deferral over their lifetime.

• Non-spouse beneficiaries (children, siblings, friends) generally face the 10-year rule, meaning careful planning is needed to avoid a tax spike.

• Minor children have a modified rule—they can stretch distributions until they reach the age of majority, after which the 10-year clock starts.

• Disabled or chronically ill beneficiaries may still qualify for lifetime stretch options.

From a wealth advisor’s lens, this often means weighing whether to name a spouse as primary beneficiary for tax deferral, or children directly to shift future growth outside the surviving spouse’s taxable estate.

Naming Individuals vs. Trusts

One of the biggest questions is whether to name an individual directly or route the inheritance through a trust. Each option has trade-offs.

Naming Individuals Directly

• Pros: Simpler, faster transfer; full control for the beneficiary; no trustee fees.

• Cons: No built-in asset protection; beneficiary could cash out immediately, accelerating taxes.

Naming a Trust

• Pros: Protects assets from creditors, divorcing spouses, or poor spending habits; allows you to control distributions from beyond the grave.

• Cons: Must be carefully drafted as a “see-through” trust to qualify for favorable tax treatment; higher administrative costs; SECURE Act rules still apply for most trust beneficiaries.

Advisor tip: Trusts make sense when you have young beneficiaries, blended family situations, or asset-protection concerns. However, they must be drafted with an estate attorney who understands retirement account rules.

Use Specific Percentages, Not Just Names

Beneficiaries should be listed by name and percentage to avoid ambiguity. For example:

✅ “Jane Doe – 50%” and “John Doe – 50%”

❌ “My children” or “My heirs”

If a beneficiary passes away before you and no new designation is made, the account may default to the estate or be divided among surviving beneficiaries in a way you didn’t intend.

As an advisor, I also recommend adding per stirpes or per capita instructions when appropriate:

• Per stirpes: A deceased beneficiary’s share passes to their descendants.

• Per capita: A deceased beneficiary’s share is split equally among surviving beneficiaries.

This small detail can prevent accidental disinheritance of grandchildren.

Keep the Beneficiary Form and Estate Plan in Sync

It’s surprisingly common for beneficiary forms to conflict with wills or trusts. This happens when people update one but not the other. Because the IRA’s beneficiary designation takes legal precedence, the mismatch can cause major disputes.

Advisor best practice: Anytime you revise your estate plan, revisit your IRA forms. Store copies with your estate planning documents, and make sure your executor or trustee knows where to find them.

Factor in Charitable Giving Goals

If you have charitable intentions, an IRA can be one of the most tax-efficient assets to leave to charity. Why? Because charities don’t pay income tax. This means they can withdraw the entire amount without losing a portion to the IRS.

For example, if you want to leave $100,000 to charity and $100,000 to your children, it’s usually better to leave the IRA to the charity and taxable or Roth assets to your kids. This preserves more after-tax wealth for your heirs.

Communicate Your Intentions

Even though IRA beneficiary designations are private, it’s wise to let your heirs know what to expect. Surprises—especially in blended families—can cause tension or even legal challenges.

I often encourage clients to share:

• Who the beneficiaries are

• Why certain people or percentages were chosen

• How they’d like the funds to be used (if they have preferences)

Open communication reduces the risk of misunderstanding and keeps your legacy intact.

Final Thoughts

Naming IRA beneficiaries isn’t just a formality—it’s a key piece of your financial legacy. The choices you make can determine whether your wealth transfers smoothly, tax-efficiently, and in alignment with your values… or whether it sparks confusion and unintended consequences.

Here’s the checklist for doing it right:

1. Name both primary and contingent beneficiaries.

2. Use specific names and percentages.

3. Understand tax rules and plan accordingly.

4. Align designations with your estate plan.

5. Review and update regularly, especially after life changes.

6. Seek professional guidance when using trusts or charitable designations.

Handled thoughtfully, your IRA beneficiary strategy can protect your family, minimize taxes, and ensure your life’s work continues to benefit the people and causes you care about most.