Starting Out

What to Know About Your Beneficiary Designation

One of the most important decisions you can make with regard to your retirement plan is naming beneficiaries. If you are married, the answer may be simple, but if you are single or separated, the answer may not be so easy.

401(k) Provisions

Single people can, in general, name whomever they would like as beneficiary of a 401(k) plan. If you are married, however, federal law states that your spouse is automatically the beneficiary of your 401(k) plan. If you wish to name someone else as beneficiary, your spouse must sign a written waiver.

For example, someone who has been separated from his or her spouse may wish to name a domestic partner as the intended beneficiary. The spouse still has a legal claim to the 401(k) assets, and the domestic partner will not be able to receive the funds unless the spouse signs a written waiver. A waiver may be appropriate in other situations, such as a second marriage in which children from the first marriage need the money more than the new spouse.

Until several years ago, one drawback was that nonspouse beneficiaries were not eligible for tax-deferred transfers to individual retirement accounts. These beneficiaries would have to begin taking distributions, on which they would have to pay income tax. However, rules signed into law in 2006 may allow nonspousal beneficiaries to have qualified plan proceeds rolled over into a special type of IRA set up on the behalf of the beneficiary via a trustee-to-trustee transfer (if allowed for under the deceased participant's plan).

Naming Minor Children as Beneficiaries

When naming minor children as your beneficiaries, consider that most plans will not pay death benefits to minors unless a trustee or guardian is set up and approved by a court. If there is no designee, the court will have to appoint a trustee or guardian. Therefore, you may want to choose a trustee.

Even if your children are older and no longer minors, you still need to consider their ability to handle the money and manage assets. A trust can be set up in their names and designated as beneficiary. This can help protect against mishandling funds.

Consult a tax professional before naming a trust as beneficiary to ensure that the trust meets IRS requirements for qualification.

Keep Your Plan Up to Date

It is wise to update your overall estate plan periodically to ensure that the beneficiary designations reflect your personal intentions for the future distribution of your 401(k) assets. As with all aspects of estate planning, consider consulting a qualified professional concerning your particular situation and name beneficiaries to fit your wishes.