Carefully Review Beneficiary Information for Your Retirement Accounts
The topic of beneficiaries and retirement accounts is one we've covered before in "Updating Your Beneficiaries. Estate Planning Tips from Joseph Motta", but in this post we go into more depth of how your 401(k) and individual retirement accounts (IRAs) do not have the same rules when it comes to surviving spouses.
Surviving Spouses: 401(k) Provides Protection. IRA Does Not.
When choosing a beneficiary for a retirement plan, it is important to understand how your spouse will be treated under the plan. Surviving spouses are treated differently under 401(k)s and individual retirement accounts (IRAs). While a 401(k) provides protections for a surviving spouse, an IRA does not.
Because the 401(k) is an employee-based retirement system, it is governed by a federal law, the Employee Retirement Income Security Act of 1974 (ERISA). Under ERISA, a surviving spouse is usually the automatic beneficiary of a retirement plan (There may be some exceptions. For example, the spouse may have to be married to the employee for a certain amount of time). The spouse must consent in writing if the employee wishes to name someone else as the beneficiary.
IRAs Are Not Governed by ERISA so Do NOT Protect Spouses
IRAs, on the other hand, are not governed by ERISA, so they do not include the same protections for spouses. This is true even if a 401(k) is rolled into an IRA. In Charles Schwab v. Debickero (U.S. Ct. App., 9th Cir., No. 07-15261, Jan. 22, 2010) a husband rolled his 401(k) into an IRA with Charles Schwab & Company after he retired. He named his children as the IRA's beneficiaries. After he died, his wife claimed that she was entitled to the account funds as his surviving spouse. She argued that because her husband rolled his 401(k) into the IRA, she should receive the same protections that the 401(k) gave her. The court disagreed, finding that the IRAs are excluded from ERISA coverage even if the funds originated in a 401(k).
You Must Specify Your Spouse as Beneficiary of an IRA
If you have an IRA and want your spouse to be its beneficiary, you have to specifically name your spouse as a beneficiary. If you have a 401(k) and want your spouse to be the beneficiary, you should still fill out a beneficiary designation form, naming your spouse. And if you roll it over into an IRA, make sure you fill out a new beneficiary designation form. If you want someone other than your spouse to be the 401(k)'s beneficiary, you will need the spouse's consent in writing.
Whether you have a 401(k) or an IRA, it is important to regularly check your beneficiary designations to ensure they are current.
Elder Law Attorney To Help Review Beneficiaries
At Joseph L. Motta, elder law and estate planning firm in Avon Lake, OH, we enjoy putting to use our knowledge and expertise to provide you with the best advice. Call 440-930-2826 to schedule a free consultation . We can review your beneficiary designations to ensure your spouse, or intended beneficiary, is properly designated to avoid delay.