It may seem like an afterthought, but naming beneficiaries for your retirement accounts is extremely important. Here’s why:
Understanding your 401(k): How it works and why it matters.
What is a 401(k) plan? Key benefits and how to maximize your savings.
Designating a beneficiary (or co-beneficiary) for a retirement account can feel like a simple administrative task, like small potatoes. However, not ensuring that your beneficiaries are named can cause serious problems for your loved ones after your death. Here’s a breakdown of what happens if the beneficiary is not current:
Account type matters
401(k) and other employer-sponsored plans
Let’s say you’re self-employed and have a Solo 401(k) or work for a company that offers a retirement plan, such as a traditional 401(k) or 403(b) plan. What happens to your retirement account when you die depends largely on whether you named a beneficiary. In that case, the plan will be transferred to the designated individuals without going through probate.
Probate is the legal process for settling the estate of a deceased person. This process verifies the will, pays any outstanding debts, and transfers any remaining assets to your heirs. For a simple probate, the entire process takes 3 to 6 months. However, it may take longer than that, and if the beneficiary is counting on it, it could put them in a financial bind.
Additionally, probate can be expensive, with filing fees, attorney fees, and other costs totaling 3% to 7% of the total estate.
Traditional IRA and Roth IRA
If you die without a designated beneficiary, the administrator of your traditional or Roth IRA will review your account agreement. If no living recipients are registered, the default recipient hierarchy is started. The general default order is that the surviving spouse is named first. If you don’t have a spouse, some guardians include children or other relatives in the beneficiary chain, but many do not and the IRA goes directly to your estate.
Once incorporated into an estate, the IRA triggers a five-year payment period instead of the 10-year rule available to the designated beneficiary. In other words, the IRA must be fully liquidated within five years.
As part of your estate, the IRA is also subject to potential creditor claims, and because it has a five-year payment period, it has a higher tax burden than if it had a ten-year payment period. The federal estate tax exemption for 2026 is $15 million, so most households won’t have to pay estate taxes, but the five-year forced liquidation could still result in a higher-than-expected tax bill.
How to check the latest information on your beneficiaries
It doesn’t hurt to set aside one day each year to check on your beneficiaries and see if they’re up to date. For example, if you were recently divorced, you may want to remove your ex-spouse as a beneficiary and replace him with someone else. The verification and update process includes only two steps:
- Gather all your retirement accounts.
- If you have not designated a beneficiary or would like to change the beneficiary on your account, please contact your plan administrator or custodian to request a beneficiary designation form.
And don’t forget, you can do it your own way. For example, you can specify both a primary beneficiary and a contingent beneficiary who will inherit the account if the primary beneficiary is unable to receive the assets. You can also designate multiple beneficiaries for a single retirement account if you wish.
Naming a beneficiary is the easiest way to ensure your loved one receives their retirement account with as little hassle as possible.
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