Why beneficiary choices matter

Your beneficiary designations usually override instructions in a will or trust for that specific account, so an incorrect or outdated form can undo years of estate planning. Retirement accounts (401(k)s, 403(b)s, IRAs, HSAs) are often among the largest assets in an estate, and they carry specific tax and distribution rules that vary by account type and by the beneficiary’s relationship to you. (See IRS Publication 590-B for inherited IRA rules and recent guidance from the SECURE Act.)

In my 15 years advising clients, the most costly mistakes aren’t dramatic—they’re small oversights that compound: naming an ex-spouse, forgetting contingent beneficiaries, or failing to consider tax consequences for non-spouse heirs.

The biggest mistakes people make (and how to fix them)

Below are common errors I see and practical steps to avoid them.

  1. Not naming any beneficiary
  • Why it’s a problem: If you leave a retirement account without a valid beneficiary, the plan’s default rules or your estate will generally inherit the account. That can trigger probate delays and, in some cases, worse tax outcomes for heirs.
  • Fix: Always name at least one primary and one contingent beneficiary on the plan provider’s form.
  1. Failing to update after life events (divorce, remarriage, births)
  • Why it’s a problem: Beneficiary forms don’t change automatically after a marriage or divorce. A former spouse can still be the named beneficiary unless you update the form.
  • Fix: Review designations after major events. I tell clients to do a beneficiary check when they file taxes or at least annually. For a practical process, consult our Updating Beneficiary Designations: Checklist for Life Changes (internal resource).
  1. Naming an estate as beneficiary
  • Why it’s a problem: Naming your estate often forces the account through probate and prevents beneficiaries from using favorable rules (like the 10-year rule for many inherited IRAs). It can also increase taxes for heirs.
  • Fix: Name individuals or a properly drafted trust instead of the estate unless advised otherwise by an estate attorney.
  1. Overlooking tax differences by beneficiary type
  • Why it’s a problem: Spouses have options—rollovers or treating the account as their own—while most non-spouse beneficiaries are subject to the post-SECURE Act rules (commonly the 10-year distribution rule). Trusts, charities, and estates follow different paths.
  • Fix: Understand the rules that apply to each beneficiary type (see IRS Pub 590-B and consult a tax advisor). I often run example scenarios for clients to show the tax impact of naming different beneficiaries.
  1. Naming minors without a plan for access
  • Why it’s a problem: Most custodial accounts and institutions won’t distribute large retirement assets to minors; if you name a child directly, the account may pass to the child’s guardian or into a conservatorship.
  • Fix: Use a trust (or name a custodian under the Uniform Transfers to Minors Act where appropriate) to control timing and protection of funds for minor beneficiaries.
  1. Using vague or incomplete beneficiary descriptions
  • Why it’s a problem: Writing “my children” or failing to include full legal names and birthdates can create confusion and disputes, especially if family members have similar names.
  • Fix: Use full legal names, dates of birth, Social Security numbers if the form requests them, and specify per stirpes or per capita distributions when naming groups.
  1. Ignoring the interaction with your will or trust
  • Why it’s a problem: A will does not override an account’s beneficiary form. People who rely solely on a will often assume their retirement funds will follow its directions—this can lead to unintended results.
  • Fix: Coordinate beneficiaries with your estate documents. Read our article Your Will vs. A Beneficiary Form for a deeper comparison.

Tax and timing implications to keep in mind

  • The 10-year rule: For many non-spouse beneficiaries who inherit IRAs after 2019, the account generally must be fully distributed by the end of the tenth year after the owner’s death, per the SECURE Act (Public Law 116-94). Eligible designated beneficiaries—surviving spouses, disabled individuals, chronically ill individuals, minor children (temporarily), and certain others—may still use life-expectancy payout options (IRS Publication 590-B).
  • Spousal options: A surviving spouse can roll the account into their own IRA, which allows them to defer required minimum distributions (RMDs) based on their own age and tax status, or they can treat the inherited IRA separately. Spousal rollovers often provide the most flexibility.
  • HSAs: If you name a non-spouse as beneficiary of an HSA, the HSA’s value becomes taxable to the beneficiary in the year of the account owner’s death; if you name a spouse, the spouse is treated as the account owner (see IRS HSA rules).

Always verify current IRS guidance (IRS.gov and Pub 590-B) when planning distributions; tax law changes can alter practical outcomes.

When to use a trust as beneficiary (and when not to)

A beneficiary trust can be useful when you want to:

  • Control timing and amounts for minors or beneficiaries with special needs.
  • Protect assets from creditors, divorce, or spendthrift issues.
  • Provide structured distributions across many years.

However, naming a trust can complicate required minimum distribution rules and sometimes eliminates favorable tax treatment for beneficiaries. If you consider a trust, use a qualified “see-through” or conduit trust drafted to comply with IRS rules so the trust can use the beneficiary’s distribution schedule. Work with an estate attorney to draft the trust and coordinate trust language with plan administrators.

Practical steps: a beneficiary-review checklist

  • Collect current account statements and beneficiary forms for each retirement account.
  • Confirm the primary and contingent beneficiaries and record full names, dates of birth, and relationship.
  • Check for institutional defaults or previously filed forms (employers sometimes keep older forms).
  • Decide whether to name individuals, a trust, or a charity.
  • Consider tax impacts by running simple examples (e.g., comparing a spousal rollover vs. the 10-year rule).
  • Update forms with the plan custodian; get confirmation in writing.
  • Store copies of signed beneficiary forms with your estate documents and inform the executor or financial advisor where to find them.
  • Revisit beneficiary designations at major life events and at least annually.

Special situations and guardrails

  • Divorce: Some states automatically revoke spousal beneficiary designations at divorce; others do not. Even when state law revokes a former spouse, confirm and update the plan forms.
  • Multiple accounts: Coordinate beneficiaries across IRAs, employer plans, annuities, and life insurance so distributions and tax burdens are managed.
  • Charities: Naming a charity can be tax-efficient because qualified charities typically receive assets income-tax-free. For large accounts, consider a partial charitable designation and leave other assets to heirs.

Real client examples (anonymized)

  • A client named a former spouse on his 401(k) and, because of a marital-agreement oversight, the funds were reachable by that ex-spouse after his death. A timely beneficiary audit would have prevented this.
  • Another client wanted equal shares for four children but failed to specify per capita vs. per stirpes language; the resulting distribution triggered an unintended unequal split when one child predeceased the account owner.

These outcomes are avoidable with intentional wording and periodic reviews.

Resources and authoritative guidance

  • IRS Publication 590-B, Distributions from IRAs and inherited IRAs (IRS.gov) — definitive guidance on inherited IRA rules.
  • SECURE Act (Public Law 116-94) — changed many rules for non-spouse beneficiaries; review its 10-year rule for inherited IRAs.
  • Consumer Financial Protection Bureau and FINRA provide helpful general guidance on beneficiary decisions and retirement planning.

For practical coordination between beneficiary forms and estate documents, see our article Your Will vs. A Beneficiary Form: The One Document That Can Override Your Final Wishes and our Updating Beneficiary Designations: Checklist for Life Changes.

Final tips from practice

  • Treat beneficiary forms as essential estate documents—not an afterthought.
  • Use clear, specific language and name backups.
  • Coordinate beneficiaries with the rest of your estate plan and consult professionals when trust language or tax interpretation is necessary.

Professional Disclaimer: This article is educational and not individualized tax, legal, or financial advice. For guidance tailored to your situation, consult a certified financial planner or an estate attorney. Reliable, up-to-date IRS guidance is available at IRS.gov (see Publication 590-B and HSA guidance).

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Sources: IRS Publication 590-B (Distributions from Individual Retirement Arrangements), SECURE Act (Public Law 116-94), Consumer Financial Protection Bureau, FINRA.