If you hold a 401(k), an IRA, a brokerage account or a life insurance policy, a form you filled out years ago probably decides who gets that money, and your will probably does not. That is why the end of the year is a good moment to check them. The review takes an hour, and it is one of the few money tasks where a stale piece of paper can send six figures to the wrong person.
This is a decision piece. It covers which document wins, what the choice of beneficiary costs your heirs in tax, and a checklist you can finish before December 31. It is general information, not legal advice, and state law varies.
Why the form usually wins
A will controls what passes through probate. Many accounts never go through probate, because they pass to whoever is named on the account paperwork. FINRA’s investor guidance says a transfer-on-death plan or other beneficiary document supersedes your will.
Retirement plans work the same way, with a federal twist. The IRS says the owner must designate the beneficiary under procedures established by the plan, which means the plan’s own form is what counts. A Department of Labor advisory council report describes how, in the Supreme Court’s Kennedy v. DuPont decision, a plan may pay according to its plan documents and the designation form on file, even when a divorce decree says otherwise.
For life insurance, the same principle generally applies: the named beneficiary is paid.
Who controls what
| Account | What controls it | Where the form lives |
|---|---|---|
| 401(k), 403(b) | Plan’s designation form | Plan administrator or recordkeeper website |
| IRA | Custodian’s designation form | The brokerage or bank that holds the IRA |
| Taxable brokerage account | Transfer-on-death registration, if you added one; otherwise your will or state default | Brokerage account settings |
| Life insurance | Policy beneficiary designation | Insurer, or employer benefits portal for group coverage |
Married participants in many employer plans need spousal consent to name someone else.
The tax math behind who gets which account
Naming a beneficiary is also a tax decision, because not every dollar you leave is worth the same to the person who gets it.
Money in a traditional IRA is taxable income to the heir when withdrawn. The IRS describes an inherited lump sum as taxable as income in respect of a decedent, and the balance at death, including unrealized appreciation, counts. Property held outside a retirement account is different. Publication 551 says the basis of inherited property is generally its fair market value at the date of death.
Here is a labeled illustration. Assume a $100,000 traditional IRA and two adult heirs, one at a 12% marginal federal rate and one at 24%. These are flat-rate simplifications of a progressive system.
- To the 12% heir: $100,000 x 12% = $12,000 of tax.
- To the 24% heir: $100,000 x 24% = $24,000 of tax.
- Difference: $12,000, from the same account and the same dollar amount.
Now compare $100,000 of stock in a taxable brokerage account that you bought for $40,000. If your heir sells right after your death, the basis has reset to about $100,000, so the gain is $0. If you had sold it yourself, you would have realized a $60,000 gain.
The practical rule: where you have a choice, pair pre-tax retirement accounts with heirs in lower brackets and leave taxable account assets to higher-bracket heirs. Your beneficiary forms are how you do that, and a will cannot.
The 10-year rule changes the timing
Most non-spouse heirs must empty an inherited IRA within a fixed window. IRS Publication 590-B says a designated beneficiary must withdraw the entire balance by December 31 of the year containing the 10th anniversary of the owner’s death. Final regulations also address whether annual withdrawals are required during those years when the owner died after required distributions began; the final rules were published in the Federal Register in July 2024.
Illustration, ignoring investment growth: a $600,000 inherited IRA emptied evenly over 10 years adds $60,000 a year to the heir’s taxable income. At a 24% rate that is $60,000 x 24% = $14,400 a year, or $144,000 over the decade. Splitting the same account equally between two heirs halves each share to $30,000 a year, which can move each heir into a lower bracket.
When the beneficiary is a child
Publication 590-B lists a minor child of the owner among the eligible designated beneficiaries, and the 10-year period starts when that child reaches the age of majority. The tax rule is the easy part. The practical issue is that a minor generally cannot manage an inherited account, and some plans and insurers may require a court-appointed custodian or guardian.
The year-end review, in order
- List every account that has a beneficiary line: each 401(k) and 403(b), each IRA, each brokerage account (check for a transfer-on-death registration), and each life insurance policy, including group coverage from work.
- Log in to each one, or request the form on file. Do not rely on memory.
- Check the primary and contingent beneficiaries. Confirm every name, relationship, and percentage. Percentages across primaries should total 100%.
- Compare the list to your life today: marriage, divorce, a birth, a death, a family member who has become estranged.
- If you are married, confirm whether your plan requires your spouse’s consent to name anyone else.
- Decide which heir should receive which account, using the tax math above.
- For minors, ask the plan or insurer what happens if a child is named directly, and talk to an estate attorney about the right structure.
- Save a dated copy of each confirmation and tell the person who would handle your affairs where to find it.
The takeaway
Your will matters, but it does not override a beneficiary form. Check every form, fix the stale ones, and use the choice of who gets which account to cut your heirs’ tax bill. The review takes about an hour, and the cost of skipping it is paid by someone else.
Sources
- FINRA, Plan Ahead: Transfer Your Brokerage Account Assets at Death.
- Internal Revenue Service, Retirement topics: Beneficiary.
- Internal Revenue Service, Publication 590-B, Distributions from Individual Retirement Arrangements (10-year rule; minor child as eligible designated beneficiary).
- Internal Revenue Service, Publication 559, Survivors, Executors, and Administrators (income in respect of a decedent).
- Internal Revenue Service, Publication 551, Basis of Assets (basis of inherited property).
- Federal Register, Required Minimum Distributions, final regulations (July 19, 2024).
- U.S. Department of Labor, ERISA Advisory Council, Current Challenges and Best Practices Concerning Beneficiary Designations in Retirement and Life Insurance Plans (2012).
The Thousandaire Editorial Team creates practical, evidence-based personal finance content for people building real wealth. We break down investing, retirement, taxes, real estate, and other wealth-building decisions with clear explanations, real numbers, and no hype
