Should you add beneficiaries to your accounts? | Vanguard (2024)

FAQs

Should you add beneficiaries to your accounts? | Vanguard? ›

The decision whether to name beneficiaries on your nonretirement accounts should be made in the context of your estate plan. Depending on the choices you've already made, your nonretirement accounts may not need beneficiaries. Consult an estate-planning attorney to determine what's best for you.

Naming a beneficiary and staying on top of your affairs not only helps speed up the process of dealing with your estate, but it also helps family members avoid fights about inheritance.

Most life insurance policies have a default order of payment if you do not name a beneficiary. For many individual policies, the death benefit will be paid to the owner of the policy if they are different than the insured person and still alive, otherwise it will be paid to the owner's estate.

Designate beneficiaries with care.

To avoid problems, coordinate the beneficiary(ies) for your brokerage account(s) with your overall estate plan. Upon death, your beneficiary designations will go into effect and can no longer be changed, so it's important to make sure they're consistent with your wishes.

Once you die, the named beneficiaries will inherit the IRA retirement assets. However, if there is no beneficiary designation when you die, different rules will apply. If you leave an IRA without a designated beneficiary, your IRA assets will become part of your estate, and they will be shared out between your heirs.

Beneficiaries are named people who take ownership of a financial account after you die. If you die without naming a beneficiary, your bank account will transfer through your will and through probate law, as appropriate.

If, for example, you opened the bank account, and later created a will indicating that the funds should go to someone else, the beneficiary designation on the bank account will still take precedence over the will when it goes to probate court. Only in rare cases can a will override a beneficiary on a bank account.

Consider your kids or the person/people taking over guardianship as the primary beneficiary. Your ex-spouse is another option. You could name your parents or siblings as contingent beneficiaries. Most single people with no kids will name their parents or siblings as primary beneficiaries.

Beneficiary Designation Takes Precedence Over A Will

A beneficiary designation supersedes a will.

It's generally a bad idea to name more than one beneficiary, for two reasons. First, if you name your spouse and someone else as beneficiaries, your spouse loses the special benefits and flexibility they would otherwise have. Second, it complicates things.

How do I avoid paying taxes on my inherited IRA? ›

Since 2020, certain heirs, including most adult children, must deplete inherited IRAs within 10 years, known as the “10-year rule.” You can minimize the tax hit by spreading out withdrawals or taking the money during lower-income years.

If you die with your IRA account and no beneficiary designated, what happens is the plan documents will determine who the default beneficiary is. So, typically, it's the decedent's estate or the surviving spouse.

Inherited Roth IRAs

Withdrawals of contributions from an inherited Roth are tax free. Most withdrawals of earnings from an inherited Roth IRA account are also tax-free. However, withdrawals of earnings may be subject to income tax if the Roth account is less than 5-years old at the time of the withdrawal.

Are there tax implications for beneficiaries upon receiving inherited assets? In general, the actual inherited assets (like the balance of a bank account) aren't subject to income tax. However, any subsequent income generated by those assets (like interest or dividends) can be taxable.

When a person passes away, their assets are distributed in accordance with either their estate plan or California's intestate succession laws. However, certain assets, including most bank accounts, can pass directly to beneficiaries, without the need for probate or the court's intervention.

The Bottom Line. POD accounts can play an important role in your estate planning by allowing your bank assets to transfer directly to your heirs without the need for probate. But they're not a substitute for a living trust and may have certain tax drawbacks, especially for wealthy individuals.

Choosing a beneficiary for a savings account is important as it guarantees that your financial assets will go to the person or entity you intend, simplifying asset transfer and providing peace of mind.