Tips and Helpful Hints When Choosing a Beneficiary for an IRA and 401k

By Bill Broich

Choosing a beneficiary for your retirement account is an extremely important decision. Often the decision is pre-empted if a you are married because specific rules are in place. Under normal situations, most married people will name their spouse as the beneficiary of their retirement accounts. If a situation were to exist where someone other than a spouse was the intended beneficiary, the written permission of the spouse would be required. Some state laws will not allow this arrangement without permission of the courts. Other factors in determining this arrangement can be the type of retirement account.

If your state of residency is not a community property state, you will be allowed to name any beneficiary you wish on your IRA account even if you are married. In community property states your spouse generally already owns ½ of your IRA account. Some community property states have a special form that needs to be signed and will be provided for you by your custodial (Alaska). Other factors that could be part of this decision are IRA accounts in place prior to marriage.

If a spouse inherits a retirement account, it can be rolled over into their own name simply by filing a beneficiary claim form, providing proof of death and proof of identity. The decedents IRA will now become the beneficiaries IRA. Once this process is completed, the IRA will be considered the original owner. The new owner will then name a beneficiary for the IRA and the surviving spouse does not have to pay income taxes until the funds are used.

Estate: You can also name your estate as your beneficiary but this will mean these funds will be subject to probate exposure and legal expenses. It generally is not a good decision to name your estate as beneficiary.

Minors: Minor children (under 18) can be named as a beneficiary but caution should be used. A minor cannot legally manage their own IRA and a guardian will need to be appointed for that purpose until the child become of age. Often times a parent can be appointed to provide this service for their child.

Multiple: More than one beneficiary can be named for an IRA. In the event of the death of the original owner, the IRA is split among the beneficiaries and teach portion becomes an individual IRA. Different rules apply for required minimum distribution if the decedent is over or under age 70 1/2 at the time of death. If under 70 1/2 then the IRA

Trust: Many people will name a trust as the beneficiary and use the trust as the distribution vehicle. There is almost no reason to use a trust (revocable living trust) because a named beneficiary on a qualified plan already avoids probate cost and expense. If a trust is named as the beneficiary, the RMD of the IRA will be based on the age of the beneficiary of the trust.

Charity: Charities can also be named as a beneficiary in an IRA. If this happens, the charity has up to five years to withdraw the funds. Since a charity is generally tax exempt, the funds will not be taxed if received as a beneficiary.

Naming a beneficiary of a qualified retirement plan can be a very important decision. It is always advised to seek legal and tax advice prior to making a final decision. Be careful and understand that over time the rules affecting these accounts can be changed or modified.

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