Whether your retirement account is a 401K or an IRA, it’s probably going to be one of your larger assets upon your retirement. In fact, a retirement account is an important component of a comprehensive estate plan, but what happens to the balance of your account upon your passing?
When your retirement account was set up, you were required to fill out a beneficiary form. The person named as the beneficiary is entitled to the remaining balance of the funds within your account. It’s important to make sure this information is kept up to date, as you are bound to go through some major life changes over the decades this account may have been in existence.
One of the primary benefits of any estate planning tool that has a named beneficiary on a form is avoiding probate, the legal process that administers an estate. When probate is avoided, the funds are available more quickly, and can address the immediate needs of the beneficiary.
Many retirement plans require that a spouse be named as the primary beneficiary. Some plans may allow you to name another beneficiary as long as your spouse’s permission is given on the beneficiary form and it is signed and notarized. This is yet another reason to ensure that all beneficiary forms, whether for retirement accounts or life insurance policies, be reviewed and updated upon major life events, such as marriage, divorce, birth of a child or even the purchase of a home.
Consequences to a Beneficiary
Your named beneficiary will have choices in how they handle the account, and these choices will vary depending on whether or not the beneficiary is a surviving spouse. These choices normally include:
- Rolling the funds into their retirement plan (for surviving spouses);
- Cashing out the account in full; or
- Electing to continue to treat the account as the deceased spouse’s account.
An estate planning attorney can provide the best advice for ensuring that your retirement plan meshes with your estate plan, as well as your estate planning goals.