This Is the ‘Biggest Mistake’ You Can Make with Your IRA, Attorney Says

Millions of U.S. households own individual retirement accounts (IRAs). Experts warn that simple mistakes with these accounts can be costly. One of the most common errors involves overlooking beneficiary designations. These designations determine who inherits the account after the owner’s death, according to Brandon Buckingham, vice president of Prudential Retirement Strategies’ advanced planning group. Speaking at the Financial Planning Association’s annual conference on Tuesday, Buckingham called it “the biggest mistake people make.”

He said some investors fail to name a beneficiary or leave outdated designations. Outdated beneficiary names can override instructions in a will, sometimes resulting in unintended heirs receiving retirement assets. “I can’t tell you how many times I’ve seen an ex-spouse inherit an IRA or 401(k) account,” Buckingham said. “It happens all the time.”

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As of mid-2024, nearly 58 million U.S. households, about 44%, owned IRAs, up from 34% a decade ago, according to a March report from the Investment Company Institute. These accounts collectively held $16.2 trillion in assets. Much of the growth comes from rollovers from employer retirement plans, with nearly 60% of pretax traditional IRAs including rollovers in 2024, the report found.

Buckingham emphasized that naming a beneficiary is critical to avoid defaulting to the estate. “The worst beneficiary you can ever have for a retirement account is the estate, whether it’s on purpose or by default,” he said. Accounts left to an estate go through probate, a legal process that can be time-consuming and expensive. Income from the IRA is also taxed at a “very compressed tax bracket,” hitting 37% once earnings exceed $15,650 for 2025, compared with $750,000 for married couples filing jointly.