In Today’s Episode of Smarter Money Matters with Dr. Jeff Camarda, Lou, and Anna…
Outline why outdated IRA and 401(k) beneficiary designations can create major tax and estate problems—and why reviewing them regularly is critical. And for your convenience, here is the webinar link Dr. Jeff mentions a few times in today’s video: https://camarda.com/blog/webinar/ira-401k-webinar/
Key points:
Beneficiary forms control IRA, 401(k), and similar accounts. They override wills and bypass probate, which means an old designation can send assets to the wrong person.
Many people set these forms during job onboarding and never revisit them, even as life changes—marriages, divorces, deaths, estranged relationships, or new children.
Once someone dies, beneficiary mistakes are often irreversible. The money must follow the form on file, not what the person “intended.”
Naming an estate as beneficiary triggers delays, probate, and often higher taxes, especially under the SECURE Act’s 10-year distribution rule.
Without proper planning, assets inherited in one year can push beneficiaries into very high tax brackets.
Use primary and contingent beneficiaries, and understand per-capita vs. per-stirpes so assets flow to the correct family branch.
Spousal waivers are required on 401(k)s if someone wants their children—not their current spouse—to inherit. Missing this step reroutes the entire account.
Institutions sometimes apply default beneficiaries when none are listed, which may conflict with your intentions.
Trusts offer far more control—allowing for conditions, protections, and tax-efficient distribution—but only work if the accounts are properly updated to name the trust.
Annual reviews help ensure beneficiaries match your current wishes, prevent probate surprises, and avoid disputes among surviving family members.
A quick yearly check of all beneficiary designations can prevent costly mistakes and protect the people you intend to benefit.
And here, again, is the webinar link Dr. Jeff mentioned: https://camarda.com/blog/webinar/ira-401k-webinar/
Video Chapters & Transcript:
[Music] Howdy folks. This is Dr. Jeff Camarda, your wealth doctor. Welcome to yet another edition of Smarter Money Matters with our super CIPs Anna and uh Lou. This week we’re talking about uh again from the Wall Street Journal inspiration this article called leaving the wrong beneficiary on your IRA plan can be a costly mistake. So what are we talking about? And we’ve actually there’s a whole webinar that we’ve done the area of using beneficiary designations on IRA or 401ks and even life insurance and other things that pass by beneficiary even pay on death and transfer on death accounts right um is it’s a very very you know uh limited functionality in terms of what you get you know you can’t use and we we’re going to talk a little bit about why trust make more sense and some of the pitfalls uh but it’s very very you rigid and you have to be careful to follow the rules and keep up with the rules, right? So, you want to check, you know, the the people that you on a frequent basis that you’ve named who you want the IRA money or 401k money to go to. Also, check your parents accounts would be a good idea and keep up with it because things change. Your wishes change, the players in your life change, divorces come and go, people become estrange, people die, and if you don’t go back and and, you know, keep up with this stuff and then you die, you’re pretty much screwed. The options to, you know, to repair it are are between nil and none. Um, so people, you know, according to quote the article, people pay attention to their wills when they sign them, but they fill out IRA and 401k beneficiary forms without really thinking and then they forget about them. And you guys get a lot of this work from new clients that are coming to Kamarda wealth to our portfolio management and and financial planning um services. Do you find that that’s you know do you have a lot of uh un messing up to do? Um I don’t know if it’s there’s a lot of messing up but there certainly an important area to keep you know to to talk about and the reason is these you know registered qualified accounts like IRA 401ks uh they bypass the will they bypass probate. So, if there’s a beneficiary on that account, no matter, you know, you may have a different beneficiary, and you will, if it’s not updated on the account, that’s the one on the account is going to be the one that’s going to be executed first. So, so if we’re brothers and you uh you went to work at a company in your 20s, maybe it’s a tech company, and now there’s $7 million in your 401k because you put all the company stock. Happens a lot, right? Sure. And then then subsequently you get married and uh um the actually that probably wouldn’t be a good example with marriages. Uh but say that you know something happens to me and your secondary beneficiary is going to be our mother maybe or maybe I have a child or something like that outside of a marriage, right? That could that could be a good example. But but what could happen though is that if you don’t keep up with that stuff, your child will never get the money. Correct. I’m dead. our moms died and it winds up going, you know, to the the provincial government in Ontario or something. Correct. Whatever the laws of up there, you know, in the Great Northwood. Correct.
You have a Yeah. You’re fine. You’re fine. No, I think um kind of to piggyback on what you guys are saying, like when people are setting up these accounts, they’re probably enrolling in a new job. So, they’re doing their health care, their payroll, all that stuff. And this is just that 401k is just one piece that they have to get on done when they’re onboarding. And they might even blow past it without putting somebody down or just throw someone’s name and never check. Yeah. Ju just to get through, you know, to just get on with their job without giving it the thought that it really deserves. And we’re talking about a lot of money some of these accounts, folks. You know, how much is in your IAS and your 401ks or maybe, you know, so um the you know, it’s also really really important. You can unsnaral this stuff while you’re still living and thinking about it, but once you’re dead, and we’ve had, you know, a number of horror stories with our clients who didn’t keep up with their documents, it becomes virtually impossible. You know, there were probate considerations or tax considerations. It really really can become and in a lot of cases, you can’t go back and make the change after after death. But, you know, it’s it’s a done deal. That’s Yeah. And here’s, you know, an example about u um the uh uh this one young lady that made his sister uh the heir of a very small retirement account. I’d like to have give her something, you know. And as the years passed, that account just grew into the biggest single asset that she had. Uh and when she died years later without changing the form, it was the largest asset in her estate. and the his her sister got the money instead of her husband and children which would have been her wish. Um so there’s a lot a lot of ways to go wrong and it’s worth spending the time. One thing you don’t want to do is name your estate as the heir. Right. Correct. You know for particularly because other than the the delays and the confusion and introducing probate if you do that it’s got to be a probate asset if you name your estate. you’re also really screwing yourself out of some pretty significant tax advantages that you would otherwise have uh um as options. And again, watch that long webinar that Megan is going to post a link. We’re not going to get into the nuance of taxation here, but you really got to be careful since secure act two, you know, and the fact you can no longer stretch RMDs required minimum distributions out over real long periods of time. Um if you don’t do it right for spouse, it’s going to be lifetime. For others, it’s 10 years. But if you don’t check the right boxes, it’s all taxed in one year, which can be disastrous, right? What happens then? That’s a that’s a large tax bill. It’s a large tax bill. One year you don’t get the deferred and it’s probably going to ex launch you into the highest tax bracket. Well, you might have been able to milk it out at 10 or 15 or 20% tax rate over a longer period. If you’re $2 million in one year, it’s all going to be the highest rate. You might lose half the money. It becomes a snowball effect. You know, it can affect your Medicare premiums. you know, you just uh there’s it’s a lot of headaches that that can happen if you know in that instance. Shall we get the talk with Sana? Sure. What do you got to say, Anna? Oh, I mean, I was going to add that the the trust and estate tax brackets escalates very quickly as well. Right. To just piggyback on the point Jeff was making, if you designate your estate and it all comes out, you’re talking about the 35% brack or 37% bracket very, very quickly. Yeah. in terms of your income bracket plus plus any state, you know, tax income tax considerations that may arise. And you also want to make sure you got backup beneficiaries, right? The so-called secondary and tertiary beneficiaries where uh um my spouse is my primary beneficiary and all children to share equally per sturppies would be secondary. That’s a pretty common and and useful pattern. Although you can do a lot more with a trust and what does that mean? That’s if I die, my spouse, my wife gets everything. If she dies first, then all my children get it and they split it. And a purse derpies just means it’s Greek for down the line, right? So if I have Yeah. branches. So if my if I have a child that that dies before I do, then her share or his share would go to his or her kids if there are any. It goes down a branch. If there is no further branch, then it gets we split among the other ones. Right. Per cap. Per capita. Yeah. So, uh, that’s a very important consideration and that that those are the two options that you have on your IAS and 401ks as an election how to and obviously that that’s that’s important to know and understand that because you know if something happens somebody somebody predesases like want again talking using your example having three kids one of them passes and then uh you know if you if you want to leave they they have a family you want to leave the their portion to their kids if you elect per capita that would not be the case it would be you know split between the two living remaining which is another reason now we’ll get into trust in a little bit but I think there’s so much more flexibility by using trust that I can’t imagine anybody not doing that with substantial means as as most of you probably do so another thing is you want to complete you know new forms every time you transfer an account excellent catch up opportunity to get things right as you change jobs and maybe we maybe you move that to an IRA a lot of you know our new clients are transferring 401ks or IAS from wherever they are uh to market custodian in which you swab and then we go through the paperwork again and confirm and discuss what you know give them input as to how to properly select a beneficiary pattern. That’s a good time to fix it. And we I mean part of our planning process that we do here is an annual uh review of their beneficiaries, making sure they have them on file um reminding them of who they are and and often clients want to change them, you know, after we have the discussion if needed to. Yeah. which is why, you know, I think it’s really important that we’ve kind of baked that into our ongoing financial planning process to bring this up and have these conversations because a lot of folks are out of sight or out of mind and they they really appreciate the input and the alternatives to to to perfect the beneficiary situation. But I don’t think a lot of advisers bother. They kind of fill out the form, they got paid and they’re done. you know, you have some really really old bene you know, inappropriate beneficiaries that that that people come to us to and to Anna’s earlier point, you know, especially on IRA accounts. You may may, you know, may have been set up 20, you know, 20, 15, 30 years ago, whatever. And then it hasn’t been looked after. And, you know, it’s it’s a good it’s an important thing to to uh to, you know, check on once in a while and see make sure you still have the benefit. Nothing makes the current spouse matter than seeing the IRA going to the first wife, right? Yeah. Yeah. or vice versa, ladies. Um, so it’s important to understand the the 401k waiver for spouses. I think by law, um, you must make your spouse the beneficiary of retirement accounts. Um, unless you get a waiver. So, if you want a different pattern, you’ve got to have the spouse sign off and say, “It’s okay. I’m waving my right to be the primary beneficiary of this account. And that that that’s really really important in order to to make sure things flow the way that you want. Right. Um so again citing from the the article uh she says say an employee remarries after her first husband dies. She wants her children to inherit a 401k and names them on the beneficiary form. But if she neglects to get a waiver from her current spouse, then if she dies with a 401k, her spouse will inherit the account, not her kids. Disastrous and probably completely off her radar, unless you watch this this uh this podcast or or got it from another source. Really, really important to remember that. Um and if that spouse had a kid, you know, kids from previous marriage or previous relationship, potentially that money could be ended up in their hands as opposed to the wife’s kids. Exactly. Yeah. Or that that kind of stuff happens all the time. Now, in this fact pattern, she dies. It goes to her husband instead of her kids, right? And then maybe they’re in a a common so-called common disaster in a car wreck, but he lives he lingers in the hospital for two weeks. So, the money passes to him, he dies, and then it goes to his kids instead of, you know, instead of her children. So, it’s really really important. uh and uh um you know and and which is why you know I want I want to spend the balance of this talking about trust a little bit uh but you will also this is also important know how defaults can help or hurt and a lot of institutions which you’ll learn more about if you watch the webinar: IRA 401k beneficiary blunders um is u really gets into the the weeds on this and gives you a lot of very specific information but there are a lot of institutions that have their own default pattern s that may or may not be what you want. If you do this and you don’t name a secondary beneficiary, then they choose one for you. I so they can just get them get the the the the the todo off their books. It’s not going to be the best thing for you, but they got to close it out somehow. So, if you don’t tell them what to do, they’re going to do something and it may not be what you want, which again is a really good reason if you have reason to have a living trust. And most of you should have the right provisions in the trust which our attorney calls flexible spending provisions to to maximize the tax benefits. But then you can use the trust and be more specific. I want the funds to be available to my current spouse to supplement her retirement income as needed to the standard of living. But then the balance will go to my five children or whatever it is you want. You could have a lot of finesse and this this person dies then this happens. or if that person you know turns out to be a drug addict then this happens you can have a lot of specificity to really protect and control the money which is just impossible with beneficiary designations I have one example to share so that’s a very good point but clients also have to remember to once they update that trust going to our earlier point of you know having a will but not having it in the on the actual account if you do design decide to to you know get a trust and then to you know go through process of doing that make sure you update your accounts. Make sure you name the trust as a beneficiary on your accounts so that you know if it when the time comes the trust is going to dictate how how the funds are distributed as opposed to whatever the beneficiary may be on there by default and review at least annually as Anna was talking earlier go through the whole shmear of everything that you know your estate um asset you know um distribution channels whether you have beneficiaries that have a trust and you’ve got some real estate you know that will pass by operational law basically something name is on there, whatever it is, look at the whole asset structure and how things will pass to make sure they wind up going where you want. Last word, Anna. Yeah, I mean, uh, working in the industry, we’ve been on the side of the beneficiary that goes to inherit accounts like this, thinks that they’re the beneficiary, maybe they’re not. It has to go to probate, whatever it may be. It’s a simple exercise. Every year, take a couple minutes, look at your accounts. Now that things are online, it’s very easy to see. and just make sure it matches what you want. Well said. Thank you once again, folks, for suffering through yet another edition of Smarter Money Matters. Till next week, thank you. Have a profitable week. Bye-bye. [Music]
