I started investing in my retirement when I was a teenager. I know, I’m a nerd.
I realize a Roth IRA at 19 is probably a little unusual. But my parents drilled into me early that I probably shouldn’t rely on Social Security to take care of me down the road. So I started saving.
I always imagined that by saving early, I’d retire early.
Travel the world.
Hop between Club Med resorts at will.
Spend my days making homemade soap or perfecting my sourdough starter.
What I didn’t spend a lot of time thinking about was where those funds would go when I eventually died.
Here’s the thing: most people don’t. And it turns out that’s a problem.
Most people elect into a workplace retirement plan, start a Roth IRA with their financial advisor, throw some dollars at it, let it coast, and get back to their life. Deciding who gets it when you die might feel like a problem for another day.
It’s not.
When you don’t name a beneficiary on a retirement account, the money doesn’t just figure itself out. Depending on the plan, it either defaults to your spouse or, if you’re single or your spouse has also died, it goes to your estate. And when it goes to your estate, it goes through probate, which means a court gets involved, your loved ones wait, and legal and estate administration expenses start chipping away at what you spent decades building. According to the American College of Trust and Estate Counsel (ACTEC), this is one of the most common and most avoidable mistakes in estate planning.
I’m actually working through this exact situation with a family right now. One sister passed away without named beneficiaries on her retirement account. As a result, the funds went into an estate retirement account rather than passing directly to her sisters as individuals.
That meant probate.
Delays.
Creditors’ claims against the estate.
And once they finally got through it, the entire account has to be fully withdrawn within five years. Under the SECURE Act of 2019, when a retirement account passes to an estate rather than a named individual, the funds must typically be zeroed out on that accelerated timeline. Named non-spousal individual beneficiaries, by contrast, generally have up to ten years, which means smaller annual withdrawals and a much smaller tax hit each year. If her sisters had been named directly, they would have avoided all of that. The outcome is mostly resolved, but it’s not the one anyone wanted.
One form. One conversation. Would have changed everything.
Most people assume their Will covers this. It doesn’t. Retirement accounts are governed by the beneficiary designation on file with the financial institution, full stop.
Now here’s where I’ll make this personal, because I’d be a hypocrite if I didn’t.
After I got married and had kids, I named my minor children as contingent beneficiaries on my retirement accounts. It felt like the obvious choice. Rookie mistake.
What I didn’t know then was that minor children cannot legally inherit assets directly. If something had happened to me and my husband, those funds would have gone into a court-supervised custodial account until they turned 18, which is not exactly what I had in mind.
I’m not alone in that mistake. It’s more common than you’d think.
So here’s what I want you to do this week: pull up your retirement accounts, your 401(k), your IRA, whatever you have, and check who’s listed as your beneficiary. Then check your parents’ accounts too, or at least have that conversation with them. This is one of those things that’s easy to set and forget, and very hard to fix after the fact.
A few things to look for:
- Is there a beneficiary named at all?
- Is it a minor child?
- Is it an ex-spouse? (It happens more than you’d think.)
- Is it still the right person given where your life is now?
Retirement accounts are just one piece of this. Life insurance, bank accounts, and even real estate (in certain states) can all have beneficiary or transfer designations that work the same way. Worth a conversation with your financial advisor and/or attorney to make sure everything is up to date.
If anything looks off, call your financial advisor or plan administrator and update it. If you’re wondering how it impacts your estate plan overall, loop in your attorney as well. It’s usually an easy fix, but only if you catch it in time.
