Don’t Leave It To Your Ex: Update Your Beneficiary Designations

January 8, 2015 | posted in: Blog | by
One of the most important pieces of information on your retirement account is also one of the most overlooked—your beneficiary designation.

If you’ve been married or divorced, had children, started a business, or suffered the loss of a spouse since setting up your retirement accounts, read on.

Similar to a will, a beneficiary designation on your 401(k) or IRA legally defines how your assets will be distributed upon your death. The rules governing beneficiaries are different for 401(k) accounts and IRAs (as the sidebar demonstrates).

Not naming a beneficiary on your account generally means that your assets will be paid to your estate and will be subject to probate. Some people name their spouse and children as beneficiaries, while others choose a charity or other entity, such as a trust. You should regularly review your beneficiary designation to ensure it is up-to-date, and share any changes with anyone who is helping you with estate planning to ensure that it meshes with your will. If you don’t know who you’ve named, review your current plan agreement, contact your plan administrator, or call your financial advisor or legal/tax professional.

Case Study: The Cost of Not Updating Your Beneficiary
John and Maura, husband and wife, want to leave a bequest to each other. Maura decides to leave 50% of her 401(k) to John upon her death and 25% each to her two children. She designates all three as her beneficiaries. Upon her death, John will receive 50% of the value of her retirement account, and her children will split the remaining 50%. John’s will specifies that Maura is to receive his assets upon his death, and designates her
as a 100% beneficiary of his IRA.

John and Maura divorce 10 years later. John remarries Trudi. Although John updates his will to leave Trudi his assets, he neglects to update his IRA beneficiary designation. When he dies, surprise! The plan will send a check for all proceeds to Maura. Even though Maura is no longer named a beneficiary in John’s will, she is the legal beneficiary of his IRA. Only if John names Trudi as a successor beneficiary on his IRA can he be certain that she will receive the proceeds as he intended.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice.  If you are seeking investment advice specific to your needs, such advice services must be obtained on your own, separate from this educational material.