After years of personal retirement savings or the accumulation of funds in your company’s retirement plan, your IRA may be your largest financial asset. If you fail to elect beneficiaries of your IRA, the default beneficiary will probably be your estate. Besides missing out on the opportunity to specifically list who inherits the funds, there are other significant drawbacks to having your estate as the beneficiary.

When your estate is the beneficiary, the IRA becomes subject to the probate process and the related legal complications, and the funds may be subject to any creditors of your estate. You also lose the ability to stretch out the distributions of the IRA, which provides for continued tax deferred growth. In contrast, when your spouse is the beneficiary, he or she can treat the inherited IRA as their own and wait until reaching age 70 1/2 to begin the required, but gradual, distributions. Individual non-spouse beneficiaries and qualifying trusts are required to begin taking minimum distributions by the end of the year following the IRA holder’s death, regardless of the beneficiary’s age. But these distributions are based on the beneficiary’s own life expectancy, thereby often greatly extending the life of the IRA. Since an estate has no life expectancy, the payout occurs quickly, eliminating any chance of further income tax deferral.

Be sure to elect both a primary and contingent beneficiary to ensure that your estate will not be elected by default. The institution holding your IRA will keep a record of your elections, but keep your own copy in a safe place and let the appropriate people know where it is