Smart401k Blog

After reading a recent report regarding investor behavior and 401(k)s, I thought I would take the time to go over some of the common pitfalls of 401(k)s.  In the coming months I will go over those pitfalls and how to avoid them.  In this initial article I thought I would take the time to go over beneficiary designations.

I know it is a delicate subject but it is a subject that we must all consider.  What will happen to your retirement plan assets should something happen to you?

When you signed up for your 401(k) plan you were given a form to designate a beneficiary or to name someone to receive your assets should you die.  The first thing that you need to do is choose who will be your primary beneficiary.  The primary beneficiary is the individual(s) that will be the first to receive the assets in your account.  The next step is that I’d recommend is to name a secondary beneficiary in case something should happen to your primary beneficiary.  Please note: if you choose more than one primary or secondary beneficiary you can split the account in equal or unequal percentages.

Your choice of beneficiary can be your spouse, family members, non-family members or even a trust.   Federal law actually dictates that your surviving spouse must be the primary beneficiary of your 401(k) plan benefit unless your spouse signs a timely, effective written waiver.

When choosing your beneficiary you will want to take the rest of your assets and estate plan into consideration.  For example, if you are married and you want to pass your entire estate on to your spouse then the calculation of final tax bill easy.  Federal law states that you can pass an unlimited amount of assets to your spouse estate and gift tax free.  However, if you have a large estate ($3.5 million or more), you may want to consider other gifting strategies as you will not be taking full advantage of your estate and gift tax exemption.

In addition, if designating a child or children there a few things to consider -  If the child is a minor or if you have concerns about bequeathing a large sum of money, you may want to consider naming a trust for their benefit as your beneficiary. This is especially true for minors as most plans will not transfer money directly to a minor.  A court will have to appoint a guardian or trustee to receive the money which could take some time.  Setting up a trust will help you avoid this process.  If setting up a trust to receive retirement assets for a beneficiary, be sure to consult a tax advisor to ensure that the trust meets the IRS requirements for qualifying as a designated beneficiary.

If you do not designate a beneficiary, your 401(k) assets are will go through probate.   This is the court process by which assets are transferred from someone who has died to the heirs or beneficiaries entitled to those assets (this process can be quite lengthy).  Probate can mean your heirs are left to pay attorneys and executors fees and delay the distribution of benefits.  In addition, if your estate receives your retirement benefits, your beneficiaries will have to pay income tax on the benefits sooner than if they received it directly.

Please review or have a professional review your beneficiary form(s) to make sure that your final wishes will be fulfilled. If you have any questions regarding beneficiary designations or if there is a 401(k) pitfall that you would like to see me discuss in the coming months, feel free to post a comment or to contact me by email at info@smart401k.com.

Buck Wendel, Investment Advisor

This entry was posted on Wednesday, September 16th, 2009 at 8:20 am and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.