Who is Getting Your Money?

When was the last time you reviewed your beneficiary designations on your retirement accounts?

By regularly reviewing and updating your beneficiary information, you can ensure that your assets are distributed according to your current wishes and that your loved ones are taken care of in the way that you intended. In most cases, retirement accounts such as IRAs or 401(k)s will typically require you to name a beneficiary when you set up the account. Since qualified retirement plans pass directly to a named beneficiary, the often-lengthy probate process, attorneys’ fees, and other costs associated with wills and settling estates are avoided. It’s important to keep in mind that life events such marriage, divorce, birth of a child, or death of a beneficiary may warrant a review and update of your beneficiary information.

Why is it important to have beneficiaries designated on your retirement accounts?

Designating beneficiaries ensures that your assets are distributed according to your wishes after you pass away.  If you don’t name a beneficiary or your named beneficiary predeceases you in death and you haven’t named an alternative, then your retirement account may be subject to the default provisions specified in the plan document by plan administrator, or applicable law rules of the account custodian which may not align with your wishes.   For example, the default rules may stipulate that your account assets will pass to your surviving spouse, if you have one. If you don’t have a surviving spouse, the assets may be distributed to your heirs according to the laws of your state of residence, which may not align with your desired distribution plan. This could result in delays, additional costs, or a distribution of your assets that may not reflect your wishes. Your assets may be distributed according to outdated instructions or even end up in the hands of someone you did not intend to receive them. This can cause unnecessary stress and financial burden for your loved ones.

The choice of a beneficiary for your retirement accounts is a personal decision that depends on your individual circumstances and goals. However, here are some general guidelines to consider:

• Spouse
  If you are married, naming your spouse as the primary beneficiary is a common choice, as it allows for a tax-efficient transfer of assets and provides for the financial security of your spouse after your death without having to go through probate. Keep in mind that in certain states, law dictates that your surviving spouse be the primary beneficiary unless they sign a certain type of waiver.

• Children or other family members
  If you do not have a spouse or if you would like to provide for other family members, you may consider naming your children or other family members as beneficiaries. Be sure to consider the financial maturity and responsibility of the person you choose. If you have children, you may consider naming them as contingent beneficiaries, either as a group or individually. This can help ensure that your assets pass directly to your children and avoid the delays and costs associated with probate. Something to consider is that a non-spouse beneficiary can’t roll your 401(k) or IRA into their own IRA to treat it as their own. They can choose to move the retirement accounts into an inherited IRA. Also, with the SECURE Act most non-spouse beneficiaries may fall under the 10-year rule in which the inherited IRA will need to be distributed and closed by the end of the tenth year after death. This could cause additional tax liability to the beneficiary.

• Trust
  If you have complex estate planning needs or want to control how your assets are distributed after your death, you may consider naming a trust as the beneficiary. This can provide flexibility and control over the distribution of your assets. There are special rules when naming a trust as the beneficiary and you should seek legal advice prior to naming the trust as your beneficiary.

• Charity
  If you have a favorite charity or non-profit organization, you may consider naming it as a beneficiary or a contingent beneficiary.

It’s important to keep in mind that the choice of a beneficiary for your retirement accounts should be based on your personal circumstances, goals, and estate planning needs. It’s always a good idea to consult with an estate planning attorney or financial advisor to help you make informed decisions about your retirement account beneficiaries. Remember – not all beneficiaries are treated alike.

* This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice.