The short answer is yes. Coming face to face with your mortality probably isn’t something you want to think about, but if you don’t plan for it, you might force your loved ones to spend time in court figuring out who gets your money instead of mourning your loss. That’s why you have to have a beneficiary set up on all of your assets—including your Roth IRA.
OK, enough doom and gloom. When you set up your retirement accounts, whoever helped you probably guided you through naming a beneficiary. That person (or website) understood the importance of doing the designation so it’s likely you didn’t leave the office (or the site) without taking care of it. If that’s not the case, here’s why you should do it today.
Why You Need to Designate a Beneficiary
If you plan to leave your assets to your surviving spouse, some of those assets will automatically become your spouse’s property. In most cases, for example, your 401(k) automatically goes to your spouse unless he or she signs an agreement allowing you to will it to someone else.
The same is true of any bank accounts on which a couple is listed jointly. But if an account is in your name only, you have to sign a beneficiary form for it to automatically go to your spouse.
You might think that a Roth IRA would have the same rules as a 401(k), but it probably doesn’t. Much like a bank account, you have to name a beneficiary—even when it’s your spouse. If you don’t, your estate could be lost in probate (the legal process of figuring out who gets your loot).
When Elvis Presley died in 1977, his estate was worth about $10 million. Sadly, after it was contested in court, the final distribution of assets was only $3 million. Where did the other $7 million go? To courts, lawyers, executors and other people that Elvis surely didn’t want to benefit from his assets. Other famous and expensive probate battles include those of Princess Diana, the late author Tom Clancy and John Lennon.
These stories are more complicated than a simple beneficiary form, but reading about them demonstrates how the lack of careful estate planning can cause financial and emotional distress for years after a person’s death.
The Steps You Need to Take
Now that you understand the importance of selecting beneficiaries for your Roth IRA, here’s how to do it.
- Check all your accounts. You may not have beneficiaries in place for all of them, or the accounts could be so old that you elected an ex-spouse or somebody who is now deceased as the beneficiary.
- Get the form. Of all the overly complicated, intimidating, fine-print, pain-in-the-backside legal forms out there, this isn’t one. Normally the beneficiary form is no more than a couple of lines. You simply provide the contact information for the beneficiary.
- Create a will. We’re talking about estate planning, so let’s do it right. If you don’t have a will, get one started. If your financial affairs don’t include much more than a little money and a lot of bills you can make a will through Legal Zoom. But the older and wealthier you get, the more complicated your will is likely to be. That’s when you need professional help. You can leave the particulars of creating your will to the professionals, but know that you can place any number of stipulations in it to make sure the people you want to receive your estate actually get it.
Here is what you are going to do today: Make sure those beneficiaries are in place on all of your financial accounts so that when you pass away your loved ones can celebrate your life and mourn your loss. Don’t make them mourn by sitting in a courtroom arguing with one another and running up costs that make their lawyers rich.