When it comes to estate planning, many people focus on wills and trusts to pass assets to beneficiaries. While those documents are important, one of the most impactful decisions is properly naming beneficiaries on your qualified retirement accounts.
Qualified accounts such as IRAs, 401(k)s, and 403(b)s pass by beneficiary designation, not by your will. This means the form on file with the custodian controls who inherits the account, regardless of what your estate documents say. If that form is outdated or incomplete, the asset may end up going through probate.
Primary vs. Contingent Beneficiaries
When completing a beneficiary designation, you are typically asked to name both primary and contingent beneficiaries.
For example, a married individual may name their spouse as the primary beneficiary and their children as contingent beneficiaries. If the spouse survives, the account passes directly to them. If the spouse has already passed away, the account then passes to the contingent beneficiaries.
Naming contingent beneficiaries is not just a formality. Without them, the account may default to your estate, which can trigger probate and eliminate certain planning opportunities available to properly named beneficiaries.
Why This Matters
Beneficiary designations affect more than just who receives the account. They also impact how and when the account must be distributed.
Under current rules, most non-spouse beneficiaries must fully distribute inherited retirement accounts within ten years. Spouses, however, have more flexibility. They could potentially roll the account into their own IRA or keep the account as their spouse's IRA depending on their ages.
When to Review Your Designations
Beneficiary forms should be reviewed after major life events, including:
Marriage or divorce
Birth of a child or grandchild
Death of a previously named beneficiary
Significant changes to your estate plan
Final Thoughts
Updating your beneficiary designations is simple, but the impact can be significant. These forms are often completed when an account is opened and then forgotten for decades.
Taking a few minutes to confirm your primary and contingent beneficiaries align with your current wishes can help avoid probate, reduce tax complications, and ensure your retirement savings pass smoothly to the people you intend. As with most planning decisions, clarity today helps prevent complications tomorrow.
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PAST PERFORMANCE IS NOT A GUARANTEE OF CURRENT OR FUTURE RESULTS. Examples of historical information included in this presentation do not, nor are they intended to, constitute a promise of similar future results. Specific client portfolio allocations, risks and returns can and may deviate from these examples depending on accounts and types of investments available through each account. Future market views by WJ Interests, LLC may vary significantly from the historical examples presented herein and no one receiving this summary should assume that WJ Interests, LLC will be able to replicate successful views in the future.