One of the most common and costly IRA mistakes is failing to keep beneficiary paperwork up to date, a retirement expert warned this week, as Americans hold a growing share of their wealth in the accounts.
Expert Warns Outdated IRA Beneficiaries Are Costly
It's "the biggest mistake people make," said Brandon Buckingham, vice president for the advanced planning group at Prudential Retirement Strategies, speaking Tuesday at the Financial Planning Association's annual conference, according to a report by CNBC.
Some investors never name a beneficiary, while others leave an ex-spouse or deceased relative on file, even though beneficiary forms generally override what's in a will, he said.
Trillions In IRA Assets Now At Stake
Individual retirement accounts now sit at the center of many families' finances. As of mid-2024, about 57.9 million U.S. households, roughly 44%, owned IRAs, up from 34% a decade earlier, according to research from the Investment Company Institute.
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Those accounts held more than $16 trillion in assets around mid-2024, much of it rolled over from 401(k) and other employer plans, with 59% of traditional IRAs containing rollover money.
With trillions of dollars at stake and many savers juggling multiple accounts, Buckingham said investors must stay organized about who inherits what. Failing to do so can send assets to the wrong person or into an expensive legal process.
Estate Beneficiary Choice Triggers Taxes And Delays
"The worst beneficiary you can ever have for a retirement account is the estate, whether it's on purpose or by default," he said. If no beneficiary is named, IRA assets typically flow into the estate and through probate, which can be slow and costly.
Buckingham explains that the income inside an estate is also taxed under compressed brackets that hit the top 37% rate at relatively low levels and an estate-owned IRA generally must be emptied within five years, limiting tax-planning flexibility compared with the 10-year window many non-spouse heirs get.
Buckingham, who is a frequent speaker and published author on subjects including IRAs, also flagged other common errors, including naming minors without a trust, failing to add contingent beneficiaries and not revisiting forms after major life events.
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