We all care about our own financial well-being and that of our families. It is why we save and invest our hard earned money for retirement and beyond. It is why we have life insurance, Wills, and estate plans. Who does not want to do everything possible to provide for their loved ones?
With that in mind, let’s consider our retirement accounts (Traditional IRAs, IRA Rollovers, ROTH IRAs, SEP IRAs, 401k plans, and 403b plans, etc.). Most of us understand how our retirement savings fit in with our overall financial plan. But do you really know how your retirement plan fits in with your overall estate plan? More specifically, do you know exactly what will happen to the assets in your 401k, IRA, or other such accounts when you die? Hint: the answer has nothing to do with your Will.
Although it is wise to have a Will and other estate planning documents in place, retirement accounts may be transferred upon death to specifically designated beneficiaries regardless of the existence of a Will. While a Will controls assets like jewelry, art, and any accounts, assets, or real property that were held solely in the decedent’s name, a Will does not dictate the transfer of jointly owned assets or accounts, or designated beneficiary assets such as retirement accounts.
When an investor establishes a retirement plan they complete and sign paperwork designating their beneficiary or beneficiaries for the account. Beneficiaries are those whom the retirement account owner has chosen to inherit the assets upon their death. A beneficiary can be a person, charity, or Trust. Designated beneficiary information can be changed at any time by the retirement account owner and the new beneficiary instructions automatically replace any prior instructions.
Designated beneficiary information should be reviewed regularly to ensure it is up to date, particularly following life-changing events such as marriage, divorce, the birth or adoption of a child, and the death of a loved one. Inadvertently leaving an unwanted person as a beneficiary, and/or forgetting to update instructions when necessary, can be costly mistakes.
Beneficiary designations do not automatically remain in place when retirement accounts are transferred, rolled over or converted into a new plan. Any job change, IRA rollover, plan conversion, or transfer of a retirement account to new brokerage firm must be followed by the filing of a new designation of beneficiaries form. Not naming any beneficiaries at all will lead to significant delay and additional expense as the retirement account now must be probated under one’s Will.
We recommend you speak with your financial advisor, accountant, and/or attorney to be sure your wishes will be met and that you understand the implications of the transfers on your overall estate plan. In a follow-up post to this blog we will explore various types of designated beneficiaries. Stay tuned for more on this next week.