Naming a Retirement Plan Beneficiary
Individual retirement accounts (IRA’s), Keoghs, 401(k)’s and 403(b)’s all have methods with which you can name a beneficiary for your retirement plan. Billions of dollars are placed into these accounts every year, and it is up to the owner of a retirement plan to determine what happens to the money when he or she dies.
Some forms of retirement plans are subject to income tax for beneficiaries (such as the 401(k)), while others, such as Roth IRA accounts, continue to be tax deferrable even after the beneficiary receives the money. You can obtain any one of a number of IRS tax books that deal exclusively with the restrictions and regulations of retirement plans.
When you create or enroll in a retirement plan, regardless of the type, you will be able to name a beneficiary for the account. Unlike P.O.D. (Payable On Death) accounts, a retirement plan allows you to name alternate or contingent beneficiaries in case you outlive your primary beneficiary.
Choosing who you name as a retirement plan beneficiary should be the result of extensive thought, and you must also look into the laws in your state concerning these types of transactions. Before you name a retirement plan beneficiary, make sure you discuss the situation with that person and make sure that they are comfortable with your decision.
The only real restriction that affects retirement plan beneficiaries is the one that deals with your spouse. If you are single, you can feel free to name whomever you’d like to be your retirement plan beneficiary, but if you are married, you must consider your spouse first.
Federal and state laws that govern retirement plan beneficiaries are concerned with the welfare of spouses in the event that the owner of the retirement plan dies first. Wanting to take care of your children is one thing, but you don’t want to leave your spouse with nothing at all. If you want to name someone else as your retirement plan beneficiary, it is always a good idea (and may be required by law) to get your spouse’s consent first. He or she can sign a waiver that expresses his or her knowledge of the third party beneficiary, and gives his or her consent to the decision you have made.
Spouses also have more flexibility when it comes to receiving a retirement account. If your beneficiary is not your spouse, the person you have chosen must make the first withdrawal within the year following your death, making 401(k)’s and 403(b)’s subject to income taxes by the beneficiary. A spouse, however, can leave the money in the account for much longer, thereby lessening the tax expense.
Make sure that you give your retirement plan beneficiary a great deal of thought, and make an informed decision based on economic standing as well as your family’s situation.
