Do not change the ownership of these to your living trust. You can name your trust as the beneficiary, but be sure to consider all your options which could include your spouse; children, grandchildren or other individuals; a trust; a charity; or a combination of these. Whom you name as beneficiary will determine the amount of tax-deferred growth that can continue on this money after you die.

Most married couples name their spouse as beneficiary because 1) the money will be available to provide for the surviving spouse and 2) the spousal rollover option can provide for many more years of tax-deferred growth. After you die, your spouse can “roll over” your tax-deferred account into his/her own IRA and name a new beneficiary.

In 2020, The Secure Act eliminated the “stretch IRA” provision which previously had permitted non-spouse beneficiaries of qualified retirement accounts (e.g., IRAs and 401(k) plans) to establish and inherited IRA and keep the account tax-deferred based on the beneficiary’s life expectancy. Under the new rules, a non-spouse beneficiary must withdraw all of the money from an inherited account within 10 years.  The new law does not apply to inherited IRAs established prior to 2020 nor does it apply to spouses or to disabled beneficiaries (provided the disabled beneficiary is not more than 10 years younger than the original account holder).  Minor children are also exempt until they reach the age of majority, at which time the child will have 10 years to completely withdraw the assets in an inherited IRA. The new rules will result in most non-spouse beneficiaries paying more in taxes than they would have under the old rule.

Another thing to consider when choosing a beneficiary for your retirement accounts is that any time you name an individual as beneficiary, you lose control. After you die, the beneficiary can do whatever he or she wants with this money, including cashing out the account and destroying your carefully made plans for long-term growth. The money could also be available to creditors, spouses and ex-spouses, and there is the risk of court interference at incapacity.

Naming a trust as beneficiary will give you maximum control because the distributions will be paid not to an individual, but into a trust that contains your written instructions stating who will receive this money and when.

It is still easy to make a costly mistake when naming a beneficiary of qualified retirement accounts and since there is often a lot of money at risk, be sure to get expert advice.