Dear Emmy, I've recently changed my will and now my son will receive any unused funds from my retirement plan. Do I need to change the beneficiary on my IRA as well?
Yes. Funds held in your IRA or 401(k) will transfer to whoever is specifically listed as your plan's beneficiary in spite of your will. This seems like such a simple answer to a simple question.
But be warned: it is not! Generally, the IRA beneficiary designation supersedes the provisions of your will or living trust. When there is a clear contradiction between your plan's beneficiary and your will's declarations and your heirs are in disagreement, lawyers may need to get involved and encumbrance ensues. Typically, but not always, I advise people to exclude their retirement plans from their will or trust.
Retirement funds are a unique asset type. They are financial instruments designed specifically for retirement savings. The required minimum annual distribution from the fund will differ depending on who the beneficiary is. This is extremely important to consider.
For most married people, leaving the account to a spouse is simplest and makes the most sense. A spouse can roll over the fund and treat it as their own. If you're married and decide to leave your retirement plan to someone other than your mate, you may need written authorization from your spouse, especially in community property states like California.
It is vitally important to understand the myriad consequences for non-spouse beneficiaries - and there are many. Non-spouse beneficiaries cannot simply roll over an inherited retirement account into their own IRA. However, if set up correctly, your son – or any non-spouse - may be able to do a trustee-to-trustee transfer of your 401(k) into an "inherited IRA." If your son elects to have the money paid out to him over his lifetime through an inherited IRA, he will keep the tax benefits inherent in an IRA by extending the distributions over his, hopefully long, life.
Also, consider your son's money handling skills. If you're concerned that he lacks financial savvy and needs to be protected from himself or others, you might consider leaving your retirement account to a trust, especially if it's a large amount. Again, this option has several limitations that you should learn about before making a decision.
With each major life event - a marriage, the birth of a child or grandchild, a divorce, or death - you should review your beneficiary form and update it if needed.
I strongly advise you, and everyone reading this month's column, to not make this important decision without speaking to a financial professional first. Choosing your retirement plan's beneficiary is one of the most far-reaching financial decisions you can make.
Do you have a question for Emmy? Please submit questions or comments by email to firstname.lastname@example.org or call 626-943-8833.
Securities and advisory services offered through NATIONAL PLANNING CORP (NPC) member FINRA, SIPC, a Registered Investment Adviser. EH Financial Group, Inc. and NPC are separate entities and unrelated companies.