Dear Mr. Market:

“In this world nothing can be said to be certain, except death and taxes.” – Ben Franklin

“When it comes to divide an estate, the politest men quarrel.” – Ralph Waldo Emerson

As Mr. Franklin notes, none of us will live forever. And if you have ever been part of a contentious division of estate assets, you surely know Mr. Emerson’s quote to be true. You can’t avoid death, but with some careful planning on your retirement accounts, your heirs can avoid (needlessly large) taxes and the quarreling. The key is setting up beneficiaries, and setting them up correctly.

Tax-deferred accounts (IRAs, Roth IRAs, 401[k]s, 403[b]s, etc.) allow you to designate specific beneficiaries. This avoids heirs contesting their share by letting you pick exactly who gets what percent of the account. Additionally, it avoids that part of your estate from going through the probate process. (There are other considerations for non-retirement accounts, but that is a topic for another day.)

It also gives the beneficiary the choice to only take out required minimum amounts each year going forward. This amount is calculated based on the value of the account and the age of the beneficiary. By taking out only that amount – or “stretching” the IRA over their lifetime – they simply pay taxes on the amount withdrawn each year. The rest of the account continues growing tax-deferred over their lifetime.

What if you have no beneficiary in place? It depends on the IRA agreement you signed with your financial institution. Sometimes the default is your spouse, and the second default is your children. If not, then it defaults to the estate being the beneficiary. In the eyes of the IRS, this means no specific person, with no specific life expectancy over which to stretch out future required distributions. Depending on the original account owner’s age, the heirs may have to empty the account within a five-year time frame! Imagine having to do that with a million dollar account – that’s a lot of income compressed into a very short time frame, all taxed as regular income for the heirs. Plus, the money left after paying the taxes no longer grows tax-deferred.

Luckily, heading off these potential problems is simple.

CHECK YOUR CURRENT RETIREMENT ACCOUNT BENEFICIARIES, AND UPDATE THEM IF NECESSARY.

Consult with your financial advisor, and maybe your estate planning attorney, to make sure things are set up to go exactly as you desire. You will make things easier on your heirs, and keep more money in their pocket.