Failing to Update IRA Beneficiaries Can Trigger Taxes and Probate, Advisor Warns

LAS VEGAS — Millions of Americans regularly contribute to individual retirement accounts, yet many overlook a critical administrative step that can jeopardize years of savings: keeping beneficiary designations current. Speaking at the Financial Planning Association’s annual conference on Tuesday, Brandon Buckingham, vice president in the advanced planning group at Prudential Retirement Strategies, described outdated or missing beneficiary forms as the most frequent and most damaging oversight he encounters.

The issue has grown alongside the popularity of IRAs. A March study from the Investment Company Institute (ICI) reported that nearly 58 million U.S. households, or roughly 44 percent, held an IRA at mid-2024. Ten years earlier, the share was 34 percent. Total assets in these accounts reached $16.2 trillion midway through this year, helped in large part by rollovers from workplace plans such as 401(k)s. According to ICI, nearly 60 percent of pretax traditional IRAs opened in 2024 contained rollover funds.

With balances rising and multiple accounts common, Buckingham urged investors to verify that the person named to inherit each IRA still reflects their intentions. Beneficiary designations sit outside a will and override its instructions, he noted. That means an IRA could pass automatically to an individual listed years earlier—even if the account holder’s broader estate plan says otherwise.

“I have seen former spouses receive retirement assets simply because no one updated the paperwork,” Buckingham told planners attending the Las Vegas event. “It happens all the time.”

The hidden cost of leaving the line blank

When no beneficiary is listed, IRA custodians typically default to the owner’s estate. Buckingham called that outcome “the worst possible beneficiary” for a retirement account, largely because it subjects the assets to probate and higher tax rates. Probate is the court-supervised process that validates a will, settles debts and distributes property. Besides legal fees and delays, probate exposes IRA income to compressed estate tax brackets. For 2025 returns, estate income reaches the top 37 percent bracket once earnings exceed $15,650. By contrast, married couples filing jointly do not hit that rate until roughly $750,000 of taxable income.

Tax timing also changes when an estate inherits an IRA. Federal rules require the account to be depleted within five years of the owner’s death if an estate is the beneficiary. Non-spouse individuals who inherit directly usually have 10 years to empty the account, providing far more flexibility to spread withdrawals and manage taxes.

Why rollovers complicate paperwork

As workers change jobs or retire, they often move 401(k) balances into IRAs for broader investment choices. Each rollover creates a new account that needs its own beneficiary form. Over time, investors may forget to submit the paperwork or assume previous instructions carry over. They do not, Buckingham stressed. “Every custodian requires its own designation,” he said.

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Households with several IRAs might also name beneficiaries inconsistently, leading to unintended disparities among heirs. Regular reviews—at life events such as marriage, divorce, birth of a child or death of a prior beneficiary—can prevent conflicts later. Financial planners typically recommend checking designations annually during tax season or at the same time statements are reviewed.

A straightforward fix

Updating an IRA beneficiary is typically free and can be done online or with a paper form provided by the account custodian. The owner must list primary and, if desired, contingent beneficiaries and indicate the percentage each will receive. The instructions become effective once the custodian records the change. Because designations override wills, legal experts advise coordinating beneficiary forms with broader estate documents to avoid contradictory directives.

For those unsure whom to name, Buckingham recommended at least designating a person rather than leaving the estate as default. Even naming multiple children rather than the estate eases administration and can lower taxes by allowing each heir to use the 10-year distribution window.

With more than $16 trillion now sitting in IRAs across the country, a signature and date on a beneficiary form may determine whether those funds transfer smoothly or become entangled in court proceedings. Advisors at the conference underscored that the task is simple compared with the potential cost of ignoring it.

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