Naming beneficiaries can ensure inheritances get into the right hands.
Invest in an IRA or enroll in a workplace retirement plan, and you’ll be faced with a key decision: choosing a beneficiary to inherit the account or benefit after your death.
It’s not unusual for some people to skip this step or name a beneficiary and never revisit that choice for years, if at all. But this can lead to problems later. You might unintentionally disinherit a loved one or leave your nest egg to an ex. Or, if the beneficiary form is left blank, a court may need to oversee the distribution of your account in a way that wouldn’t be to your liking.
Retirement accounts can hold decades’ worth of savings, which is why beneficiary designations are so important.
“Who you designate will be critical to make sure that the people you want to get your money get your money,” says Robert Toth, whose law firm in Fort Wayne, Ind., specializes in building retirement plan products.
There are a variety of retirement accounts, and the rules on naming beneficiaries for them can differ. Here’s what you need to know.
Who Can You Name as a Beneficiary for Retirement Accounts?
Your primary beneficiary is first in line to inherit the retirement account or plan benefit.
“Most people name their spouse,” says Ian Berger, an IRA analyst with Ed Slott and Company. And some retirement plans even require it if workers are married.
Otherwise, your primary beneficiary can be, say, a parent, sibling, friend, child, or even a trust or charity. In some cases, you can name multiple people as primary beneficiaries and list what percentage of the account each should receive. If a minor inherits your account, though, a guardian will need to be appointed to manage the funds on the child’s behalf until they reach the age of majority—18 or 21 in most states.
Besides a primary beneficiary, you should also name one or more backups in case your first choice predeceases you. If that happens, your contingent beneficiaries will inherit the money instead.
“Part of planning is not just putting in primary beneficiaries but also thinking about the worst-case scenario. Be a pessimist,” says Angela Vallario, a professor who teaches estate planning at the University of Baltimore School of Law and the author of The Fundamentals of Estate Planning (Maryland). “Always make sure there is a backup.”
Note: For many, a pet is a family member. Even so, you can’t name a pet as a beneficiary. You can, however, set up a pet trust in which you set aside money that a trustee can use for your pet’s care.
How Beneficiary Rules Vary by Retirement Plan Type
Beneficiaries are also determined by the type of retirement account and your marital status.
If you’re single, you are free to name anyone—parent, partner, friend, or another—as the beneficiary of your 401(k), 403(b), 457 account or IRA.
But if you’re married, the rules differ depending on whether the retirement plan is governed by the federal Employee Retirement Income Security Act (ERISA). ERISA covers retirement plans, such as 401(k)s and some 403(b)s, offered by private employers. These plans assume that your spouse is the beneficiary of the entire balance. You can name another person as the beneficiary, but only if you get your spouse’s written consent.
Public plans, such as 403(b)s offered to public school teachers or 457 plans for state and local government workers, don’t fall under ERISA, Berger says. You can name anyone you want as a beneficiary, even if you’re married, he says. Be aware, though, that the plan may still require your spouse to be the primary beneficiary unless they agree otherwise. Check with your plan.
A beneficiary of a traditional pension, also called a defined benefit plan, also depends on whether it’s covered by ERISA. Union and other private-sector pensions, for example, are ERISA plans, and typically a spouse will be the beneficiary, Berger says. But government-sponsored pensions don’t come under ERISA, and you can name someone other than a spouse to inherit a death benefit, he says.
With traditional and Roth IRAs you can name anyone you want as a beneficiary—even if you’re married. Note: If you live in one of the nine community property states—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin—your spouse is entitled to half of the IRA assets acquired during your marriage.
Learn how to make the most of your retirement plans, from a 403(b) to a traditional pension, with NEA Member Benefits’ “An Educator’s Guide to Retirement Income Planning.”
When and Why You Should Update Your Beneficiary Designations
It’s important to update your beneficiaries after major life changes such as a marriage, the birth of a child or divorce. It’s not unheard of for young workers starting a job to name a parent as a beneficiary and not revise that decision even once they have married and had children.
Vallario advises reviewing beneficiary designations annually.
“Every year, we are all forced to look at health insurance. We all have to pick a plan. We all have to add to our flex spending account,” Vallario says. “Why don’t people at that time every year confirm that they have their beneficiary designation and a backup? That would be ideal.”
Be aware that a beneficiary designation overrides a will. So even if you express your wishes in a will on who you want to inherit your retirement money, it will go to whoever is listed on the account’s beneficiary designation form—another reason why it’s key, especially after a divorce, to keep beneficiary designations current.
What Happens If You Don’t Name a Beneficiary?
If you leave the beneficiary form blank, the retirement plan or IRA may designate who will inherit the money, usually starting with the surviving spouse, followed possibly by other relatives and eventually your estate.
But workers shouldn’t rely on this, Berger says.
“They should be making the decision,” Berger says. “Their wishes should be fulfilled. The plan or the IRA can’t do that if they didn’t bother to designate a beneficiary.”
If a retirement account goes to your estate, it will end up in probate, a court-supervised distribution of assets that can be expensive and time-consuming. The court will distribute the money based on instructions in your will, Vallario says. And if you have no will, state law will determine who’s in line to inherit your money, she says.
That could lead to some unhappy heirs.
“Probate has such a bad name because that’s where people go to fight in front of the judge for the money,” Toth says. “Legal fees can eat up a probate estate.”
But you can avoid these problems and make things easier for your loved ones by naming primary and backup beneficiaries and keeping them up to date as your life changes.
Life insurance can also protect your loved ones. Learn about complimentary life insurance for teachers issued by The Prudential Insurance Company of America and offered to eligible NEA members. And you can change your beneficiaries at any time.
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