Beneficiaries — Who Should Benefit From Your Retirement Savings?


Beneficiaries — Who Should Benefit From Your Retirement Savings?

Make a quick mental inventory of all your possessions, including retirement accounts and life insurance policies. If you were to die tomorrow, who would you want to inherit your assets? You can draw up a will and be very specific about who gets what, except when it comes to retirement accounts, life insurance and many other financial accounts. Beneficiary designations trump your will.

Make sure the correct beneficiary gets the benefits

If you have $100,000 in your 401(k) and have a $1 million life insurance policy, you want to make sure those assets get distributed to the right people when you die. Your beneficiaries receive these assets directly, without having to deal with the courts. If you leave the beneficiary form blank, the assets are facilitated through the probate process. The distribution rules vary depending on if the individual died with or without a will. If there was no will, the probate process in your state will determine who gets your assets. In some cases, assets might be divided equally among all living relatives, including ex-spouses.

Who should be your beneficiary?

If you’re married, your spouse is probably going to be the beneficiary. Employer-sponsored retirement plans generally require you to get written permission to name someone other than your spouse. A spousal beneficiary has a lot of flexibility on how assets are distributed. Three of the spousal options are:

Beneficiary designations trump whatever’s in your will.

  • Roll over the balance to an IRA or another retirement plan — This keeps the money in a tax-deferred account in the beneficiary’s own name.
  • Leave the money in the original plan account — If the beneficiary does not immediately need the money, this “take-no-action” option is the simplest approach.
  • Take the money in cash — This option works if the money is needed for immediate expenses, but income taxes will be due on the distribution and you lose out on the future earning potential of those investments.

If you’re single, you can name anyone as your beneficiary. Young people with modest assets sometimes name their parents. But as your retirement account value grows and your parents age, be aware of how an inheritance from you might create tax issues for your parents.

One mistake parents often make is naming minor children as beneficiaries. The distribution rules to children under age 18 vary by state, and unless you’ve also named legal guardians for your kids through a trust, the courts will decide how and when your kids receive the money.

It’s also a good idea to name contingent beneficiaries—one or more people who receive your assets if your primary beneficiary dies or is incapacitated.

Dot the "i"s and cross the "t"s

You are working hard to accumulate money in your retirement accounts. Make sure you control who inherits your savings by updating your beneficiary designations whenever something happens in your life, such as a marriage, the birth of a child, a divorce or the death of a spouse. ING can help guide you down this part of your financial planning path.