9 Things to Know About IRA Beneficiaries
When it comes to IRA inheritance and beneficiary designations, a self-directed IRA is treated the same as any other IRA.
Choosing who to name as beneficiaries for your IRA and how to make your designations can be simple or complex, depending on your situation and goals.
Rules around how a non-spouse beneficiary treats an IRA inherited after December 31st, 2019 changed due to the SECURE Act. These changes merit consideration if you have not reviewed your account beneficiaries in some time.
The best practice is to speak with your licensed estate planning counsel about IRA beneficiary designations. Following are some tips to help guide that conversation.
When are Beneficiaries Designated?
You are required to name at least one primary beneficiary when you setup an IRA account. You can choose to make additional designations during the account setup or wait until after the account setup is complete.
You can add or change IRA beneficiary designations at any time, usually by submitting a simple form to the IRA custodian.
Primary and Contingent Beneficiaries
Beneficiaries come in two classes: primary and contingent. A primary beneficiary will inherit their allocated share of the IRA at your passing. If no primary beneficiary is available, then the contingent beneficiary designation will be applied.
When you designate beneficiaries, you must allocate 100% primary beneficial interest. You can designate one or more beneficiaries as primary, so long as the allocation adds up to 100%.
Naming contingent beneficiaries is optional. If you name any contingent beneficiaries, you must allocate 100% of the account value across the named parties.
Naming Your Spouse
Most married IRA account holders choose to name their spouse as the primary beneficiary for their IRA. A spousal inheritor has the most flexibility and control.
They can either just move the existing account into their name or roll the IRA into another IRA or 401(k) in their name. The funds in the IRA are treated as theirs, and subject to all the same rules and timelines for distributions as if the account was initially opened in their name.
Alternately, a spouse can choose to be treated as a beneficiary. This will allow the spouse to take distributions from the account without a 10% penalty for early distribution if they are under age 59 ½. This beneficiary election will mean the account is subject to Required Minimum Distributions using the spouse’s life expectancy table. A beneficiary IRA of this type cannot be consolidated with other retirement plans in the spouse’s name.
Naming a Non-Spouse
You can name any individual or entity as an IRA beneficiary. Depending on your marital status, family structure, and goals, you might choose to name one of more of the following:
- Children
- Parents
- Siblings
- Friends
- A Trust
- Charitable organizations
- Educational institutions
The timeline for distributions and how the distributions are taxed will vary based on the type of beneficiary.
Community Property States
If you are married and live in a community property state, you must obtain your spouse’s written consent if you wish to name someone other than your spouse to receive any fraction of the primary beneficial share.
Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
Naming a Trust
Naming a trust as beneficiary for your IRA can have several advantages.
If you have beneficiaries who are minors or otherwise unable to care for themselves, using a trust is a good way to ensure they are cared for based on your instructions.
With a trust, you can continue to control who contingent beneficiaries are. If you were to directly name a second spouse as your beneficiary, they could change the designations on the account once they inherit it and cut out children from a first marriage you may wish to include, for example. A properly implemented trust will eliminate such a situation.
Taxation can flow to the receiving beneficiary or occur at the trust level depending on how things are configured.
Utilizing a trust effectively is complex. Be sure to seek qualified counsel if you choose to name a trust.
If you have a trust named as beneficiary on your IRA, it would be a good idea to ensure it is compatible with the changes created by the SECURE Act.
Distribution Rules for Different Beneficiary Types
Who you name as beneficiary can determine how quickly the account needs to be distributed.
A non-named beneficiary such as an estate, charity, or trust that does not specifically name individual beneficiaries will need to distribute the entire IRA within a 5-year period if the account holder was under the age of 72 when they passed. If the IRA owner was over age 72, then the life expectancy table of the owner is used to determine the required minimum distribution amount each year.
An “Eligible Designated Beneficiary” will be able to distribute the account over time. The longer of the beneficiary’s or the account holder’s life expectancy table will be used to determine the minimum required distribution each year. Eligible Designated Beneficiaries include:
- The owner’s spouse
- Owner’s children under the age of 18, though they must then fully distribute the IRA by the age of 28 – ten years from reaching majority.
- A disabled or chronically ill individual
- Any other individual who is not more than 10 years younger than the original IRA owner
A designated beneficiary who is not in the list of Eligible beneficiaries must distribute the account in full by the end of the 10th year following the IRA account holder’s death.
Keep Your Designations Current
It is important to regularly review your IRA beneficiary designations and make updates as appropriate. We recommend you perform a mid-year financial review in the summer when financial and tax issues are usually quiet and include an IRA beneficiary check as part of this process.
Make Sure your Beneficiaries Know about your Self-Directed IRA
One of the unique things about a self-directed IRA is that there is not a statement with a list of publicly traded assets that an inheritor can easily look up.
When you take control of your IRA and invest in real estate, private funds, cryptocurrency, and other alternative assets, you are really the only person who knows what is held in the portfolio.
It is therefore important that you keep records of your plan holdings in a place known to the person who you have chosen to administer your affairs.
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Quick answers to common questions
We’ll take you through a simple, step by step process designed to put your investment future into your own hands…immediately. Everything is handled on a turn-key basis. You take 100% control of your Retirement funds legally and without a taxable distribution.
YES! In 1974, Congress passed the Employee Retirement Income Security Act (ERISA) making IRA, 401(k) and other retirement plans possible. Only two types of investments are excluded under ERISA and IRS Codes: Life Insurance Contracts and Collectibles (art, jewelry, etc.). Everything else is fair game. IRS CodeSec. 401 IRC 408(a) (3)
It’s actually pretty simple. Early on, regulators let the securities industry take the lead in educating the public about retirement accounts. Naturally, brokers and banks promoted stocks, bonds, and mutual funds—giving the impression that those were the only allowed investments. That was never true... and still isn’t. You can probably guess why they kept the rest under wraps.
It is possible to use funds from most types of retirement accounts:
- Traditional IRA
- Roth IRA
- SEP IRA
- SIMPLE IRA
- Keogh
- 401(k)
- 403(b)
- Profit Sharing Plans
- Qualified Annuities
- Money Purchase Plans
- and many more.
It must be noted that most employer sponsored plans such as a 401(k) will not allow you to roll youraccount into a new Self-Directed IRA plan while you are still employed. However, some employers will allow you to roll a portion of your funds. The only way to be completely sure whether your funds are eligible for a rollover is by contacting your current 401(k) provider.
A Solo 401(k) requires a sponsoring employer in the format of an owner-only business. If you have a for-profit business activity – whether as your main income or as a side venture – and have no full-time employees other than potentially your spouse, your business may qualify. The business may be a sole-proprietorship, LLC, corporation or other entity type.
A self-directed retirement plan is a type of IRA or 401(k) that gives you greater control over how your retirement funds are invested. Unlike traditional accounts held at banks or brokerage firms that limit you to stocks, bonds, and mutual funds, self-directed plans allow you to invest in a wide range of alternative assets including real estate, private businesses, precious metals, cryptocurrency, and more.
These plans still follow the same IRS rules and maintain the same tax-deferred or tax-free benefits as conventional retirement accounts. The difference is simply in how and where you choose to invest.
No. Moving to a self-directed IRA or Solo 401(k) does not trigger any taxes, as long as your funds are eligible for rollover.
Self-directed retirement plans maintain the same tax-advantaged status as traditional plans offered by banks or brokerage firms. The key difference is flexibility—our plans are designed to give you greater control and allow for a wider range of alternative investments beyond stocks, bonds, and mutual funds.
A prohibited transaction is any action between your retirement plan and a disqualified person that violates IRS rules and can lead to serious tax consequences. Under IRS Code 4975(c)(1), prohibited transactions include:
- Selling or leasing property between your plan and a disqualified person Example: Your IRA cannot purchase a property you already own.
- Lending money or extending credit between the plan and a disqualified person Example: You cannot personally guarantee a loan your IRA uses to buy real estate.
- Providing goods or services between your plan and a disqualified person Example: You can’t use your personal furniture to furnish a rental property owned by your IRA.
- Using plan income or assets for the benefit of a disqualified person Example: Your IRA cannot buy a vacation home that you or your family use.
- Self-dealing by a fiduciary (using plan assets for their own benefit) Example: Your CPA shouldn't loan your IRA money if they’re advising the plan.
- Receiving personal benefit from a deal involving your IRA's assets Example: You can’t pay yourself from profits your IRA earns on a rental.
If a transaction doesn’t clearly fall within the allowed guidelines, the IRS or Department of Labor may review the situation to determine if it qualifies as a prohibited transaction.
Disqualified persons are individuals or entities that are prohibited from engaging in certain transactions with your IRA or 401(k). Doing so could trigger a prohibited transaction, which may result in taxes and penalties.
Here’s who is considered a disqualified person:
- You (the account holder)
- Your spouse
- Your parents, grandparents, and other ancestors
- Your children, grandchildren, and their spouses
- Any advisor or fiduciary to the plan
- Any business or entity owned 50% or more by you or another disqualified person, or where you have decision-making authority
These rules exist to prevent self-dealing and ensure your retirement plan remains in compliance with IRS regulations.
(Reference: IRC 4975)
Understanding and following these rules can be tricky, but it’s very doable. The best way to stay compliant is to work with professionals who specialize in self-directed retirement plans. They can help you navigate IRS guidelines and avoid prohibited transactions.
If an IRA holder is found to have engaged in a prohibited transaction with IRA funds, it will result in a distribution of the IRA. The taxes and penalties are severe and are applicable to all of the IRA’s assets on the first day of the year in which the prohibited transaction occurred.
Yes. While self-directed retirement plans allow for a wide range of investments, there are a few important restrictions.
You cannot invest in collectibles or life insurance contracts, and you must avoid prohibited transactions—activities that benefit you personally rather than the retirement plan. These include things like buying or selling property to yourself or family members, using plan assets for personal gain, or self-dealing in any way.
Violating these rules could cause your entire IRA to lose its tax-advantaged status. To protect your account, it’s essential to work with professionals who understand IRS regulations and can help you stay compliant.
This is a common misconception. In many cases, professionals may simply be unfamiliar with self-directed retirement plans, as they fall outside their usual scope of work. CPAs and tax preparers are trained to file taxes, not necessarily to advise on alternative retirement strategies. Financial advisors and brokers often work for firms that focus on traditional investments like stocks and mutual funds—and may not benefit from or support alternative options like real estate or private lending.
Self-directed retirement investing is legal under IRS rules—but like any specialized area, it requires working with professionals who understand how it works.
The IRS has rules in place to make sure your IRA is used only for the exclusive benefit of the retirement account—not for personal gain or to help family members. These rules can get complicated because there are many ways a conflict of interest can occur, even unintentionally.
For example, if your IRA buys a house and rents it to your mother, you might be reluctant to evict her if she stops paying rent. That emotional connection creates a conflict between what’s best for your IRA and your personal relationships, something the IRS aims to prevent.
These rules help ensure your retirement account stays compliant and protected. (See IRC 408)
Yes. Most tax-deferred retirement accounts—such as Traditional IRAs, old 401(k)s, 403(b)s, and TSPs—can be rolled over into a self-directed IRA or Solo 401(k), depending on your eligibility. Roth IRAs cannot be rolled into these accounts.
You can contribute directly from earned income, subject to annual IRS contribution limits. The method and amount depend on the type of plan you have (e.g., Solo 401(k) vs. IRA).
To take a distribution, you'll request funds through your custodian or plan administrator. Distributions may be taxable depending on your account type and age. Early withdrawals may be subject to penalties.
For 2025, the Solo 401(k) max contribution limit is $81,250 if age 60-63, $77,500 if age 50-59 or 69+, and $70,000 if under 50. Traditional and Roth IRAs have a limit of $7,000 ($8,000 if age 50+). Limits are subject to IRS adjustments.
Yes. IRA contributions are typically due by your personal tax filing deadline (e.g., April 15). Solo 401(k) contributions follow your business tax filing deadline, including extensions.
IRS reporting requirements vary depending on the type of self-directed retirement plan you have. Here’s a quick breakdown of what you need to know
Please note: Our team can help you understand what’s required for your specific account, but we don’t provide tax or legal advice. We always recommend working with a qualified tax professional to ensure full IRS compliance.
Self-Directed IRA (Traditional or Roth)
- Form 5498 – Filed by your custodian each year to report contributions, rollovers, and the fair market value (FMV) of your account.
- Form 1099-R – Issued if you take a distribution or move funds out of your IRA.
- Annual Valuation – You'll need to provide updated FMV for any alternative assets held in the account, such as real estate or private placements.
Solo 401(k)
- Form 5500-EZ – Required if your plan assets exceed $250,000 as of year-end. Must be filed annually by the plan participant.
- Form 1099-R – Required if you take a distribution or roll funds out of the plan.
- Contribution Tracking – Keep records of employee and employer contributions. These are not filed with the IRS but may be needed for tax reporting or audits.
SEP IRA
- Form 5498 – Filed by your custodian to report contributions and FMV.
- Form 1099-R – Filed by your custodian. Issued for any distributions.
- Employer Contributions – Must be reported on your business tax return (and on employee W-2s, if applicable).
Health Savings Account (HSA)
- Form 5498-SA – Filed by your HSA custodian to report contributions.
- Form 1099-SA – Filed by your HAS custodian. Issued for any distributions.
- Form 8889 – Must be included with your personal tax return to report contributions, distributions, and how funds were used.
