Some days it seems that Murphy’s Law will help the IRS take what they never should in the first place. Two years ago, I wrote an article On my Death, Please, Take a Breath, sharing the story of a man who inherited an IRA from his sister, and, being afraid of the stock market, cashed it out, creating a hefty tax bill, when minimum withdrawals would have kept him in the 10% bracket at most.
I’m reminded of this as I was answering a question elsewhere (are Elle and I the only readers of Usenet? Hmm). A woman passed away and left an IRA worth $40K, but no designated beneficiary was listed on the account. This makes the IRA part of the probate estate which is subject to creditors. An IRA that has a proper beneficiary designation will pass to the beneficiary outside of probate and is typically not subject to any creditor obligations, except perhaps taxes due the IRS, especially estate tax. In this particular case, the deceased had obligations of $60K as an individual, so the value of the IRA was completely lost. In this case, there were no fancy tricks required, no trusts, no expensive lawyers needed. The IRA custodian has a simple form that should be filled out when opening the IRA to avoid this potential loss.
With the end of the year coming up, now is a good time to check your retirement account beneficiaries. If you have any old accounts, it’s a good idea to double check that you set it up properly and fix it if you didn’t. If you are divorced, it’s possible your ex is still listed as beneficiary on an older account. It would be a shame if that were the case and when you pass, your current wife discovers it’s not her money. Perhaps (God forbid) a child has predeceased you, and he or she was listed as the beneficiary. All these situations point toward the need to simplify your finances. If you are retired, you can easily reduce your accounts to one IRA and one Roth IRA, and eliminate the need to chase the paperwork on multiple old 401(k)s or IRAs that were set up at different times.
Do you have a friend or loved one who made a similar mistake? I hope this article can help others avoid this type of costly error.