Adam Bergman

Founder, Tax Lawyer, Author

Most people fill out a beneficiary form once, name a spouse, and never look at it again. The problem shows up when that beneficiary dies first and nobody is listed behind them. Contingent beneficiaries are the backup that keeps your IRA or 401(k) out of probate and in the hands of the people you actually chose, and in my experience as a tax attorney they’re one of the most overlooked lines in all of retirement planning.

Primary vs. Contingent Beneficiaries

Your primary beneficiary is first in line. When you die, the account goes to that person, or is split among several primary beneficiaries by the percentages you set. A contingent beneficiary, sometimes called a secondary beneficiary, is the next tier. They inherit only if no primary beneficiary is able to take the account, which usually means the primary died before you, died at the same time, or chose to disclaim it.

A common setup is a spouse as the 100% primary and the children as equal contingents. If the spouse survives you, the children get nothing from that account directly, and the spouse can name new beneficiaries later. If the spouse is already gone, the children step up automatically, with no court involvement. That automatic step-up is the reason to name a contingent at all.

One point I stress with every client: the beneficiary designation form controls who gets a retirement account, not your will. A will that leaves everything to your kids does nothing for an IRA whose form still names an ex-spouse or a parent who has since passed away. For a 401(k) or other ERISA plan, federal law generally also makes your spouse the beneficiary unless they’ve signed a written consent to someone else.

What Happens If Your Beneficiary Dies First

The answer depends on who else is on the form. These are the situations I see most often:

The last row surprises people. Once you die and your primary beneficiary survives you, even briefly, the account belongs to them. If they then pass away before moving it into an inherited IRA, the money typically follows their estate plan, not yours, unless they had already named their own successor beneficiary.

Why Defaulting to Your Estate Is a Problem

When no beneficiary is left, the account falls back to the default terms in your IRA custodial agreement or plan document. For most accounts that means your estate. That’s a poor outcome for three reasons. First, the account has to go through probate, which is public, slow, and can tie up the money for many months. Second, it’s exposed to the claims of your creditors in a way a directly inherited account often isn’t. Third, an estate isn’t a person, so under the IRS rules it isn’t a designated beneficiary. If you died before your required beginning date, a non-designated beneficiary generally has to empty the account by the end of the fifth year after your death, according to IRS Publication 590-B. That’s half the 10 years most individual heirs would get.

Per Stirpes vs. Per Capita

If you name more than one beneficiary in a tier, you need to decide what happens to a share when one of them dies before you. Two Latin terms do the work.

Per capita (“by the head”) splits the account among the beneficiaries who are still alive. Say you name your three children equally and one dies before you. Under per capita, the two surviving children each take half, and the deceased child’s kids get nothing from that account.

Per stirpes (“by the branch”) keeps each share within that beneficiary’s family line. In the same example, each surviving child takes one-third, and the deceased child’s third passes down to their children.

Neither is right for everyone, but if you want grandchildren to step into a parent’s place, per stirpes is usually what you mean. Not every custodian offers it on the standard form, so check before assuming it applies, and attach an addendum if needed.

Simultaneous Death and Disclaimers

Spouses who die in the same accident create a special problem: who died first? Many states follow a version of the Uniform Simultaneous Death Act, which generally treats a beneficiary who doesn’t survive you by 120 hours as having died before you. That pushes the account to your contingent beneficiaries rather than through your spouse’s estate. Check your state’s rule and the custodian’s form, since some plans set their own survival period.

A living primary beneficiary can also pass the account down on purpose by disclaiming it. Under the Treasury regulations for a qualified disclaimer, the refusal must be in writing, delivered within nine months, made before accepting any benefits from the account, and the beneficiary can’t direct where the money goes. It then passes as if they had died first, usually to the contingent. A surviving spouse with plenty of other assets will sometimes disclaim so the account goes straight to the children, which only works if contingents were named in the first place.

How Contingent Beneficiaries Are Taxed

A contingent beneficiary who inherits is treated exactly like any other beneficiary under the SECURE Act rules. What matters is who they are, not which line of the form they were on.

Most individuals inheriting today must empty the account by the end of the 10th year after the owner’s death, according to the IRS beneficiary rules. If you died before your required beginning date, they can generally take the money whenever they like within that window. If you had already started required minimum distributions, which begin at age 73, the final IRS regulations require them to keep taking annual distributions in years one through nine and finish by year 10, starting with 2025 distributions.

A smaller group, called eligible designated beneficiaries, can still stretch distributions over their own life expectancy:

• A surviving spouse
• A minor child of the account owner, until reaching the age of majority
• A disabled or chronically ill individual
• Someone not more than 10 years younger than the owner

This is why the choice of contingent matters for taxes too. If your spouse predeceases you and your contingents are your adult children, each will be on the 10-year clock. If your contingent is your estate, or there’s no contingent at all, the payout rules are often less favorable and probate adds months of delay on top. Roth accounts are still subject to these timing rules, but qualified distributions come out tax-free, which makes a Roth a particularly good asset to leave to younger heirs.

How to Name Contingent Beneficiaries the Right Way

Naming a contingent takes five minutes, but small mistakes on the form cause most of the problems I see after a death.

• Use full legal names and identifying details. “My children” invites disputes. List each person with a date of birth or Social Security number.
• Make the percentages add up to 100% in each tier. Primary and contingent tiers are calculated separately.
• Choose per stirpes or per capita on purpose. If the form doesn’t ask, find out what the custodian’s default is.
• Don’t name a minor outright. A child can’t legally control an inherited IRA, so a court-appointed guardian may be needed. A properly drafted trust or a UTMA custodian is usually the better contingent for young children.
• Coordinate trusts with an attorney. A trust can be a contingent beneficiary, but only a trust that meets the IRS look-through rules is treated favorably for distribution purposes.
• Review after every life event. Marriage, divorce, a birth, or a death in the family should all send you back to the form.

Extra Considerations for Self-Directed IRAs

With a Self-Directed IRA, the stakes go up because the account often holds assets that can’t be split or sold in a day, like a rental property, a private company stake, or an LLC interest. If the account ends up in your estate, a probate court may need to approve every step before anyone can collect rent, pay property taxes, or sell the property. With clear primary and contingent designations, the custodian can retitle the asset into a Self-Directed Inherited IRA for each beneficiary and the investments keep running. Think, too, about whether your contingents can actually manage the asset. Three siblings inheriting one rental house together need a plan for who makes decisions, and I cover the options in Can an Inherited IRA Be Split Between Siblings?

Final Thoughts

A contingent beneficiary costs nothing to name and can save your family months in probate, a faster tax bill, and a fight over who was supposed to get what. Your primary beneficiary is the plan for how things are supposed to go. Your contingent is the plan for when life doesn’t follow the script. If you want to go deeper, I explain what the IRS does when no one is named in What Happens to an IRA With No Named Beneficiary? and walk through the payout rules heirs face in Inherited IRAs: Everything You Need to Know. Take ten minutes, pull up every retirement account you own, and make sure each one has a name in both lines.

This content is for educational purposes only and does not constitute legal, tax, or investment advice. Consult a qualified professional before making any investment decisions.