Choosing Beneficiaries for a 401k Plan

by Gary Foreman

Choosing a beneficiary for your 401k is an important decision, and like all important financial decisions, making a good choice can pay big dividends. Here’s what you should consider before choosing beneficiaries for your 401k.

Choosing beneficiaries for your 401k plan could be one of the most important decisions you make.

And it’s not as simple as your HR department might say.

Choosing beneficiaries can make a big difference in how your 401k is distributed if you die.

What is a 401k beneficiary?

Let’s begin by defining 401k beneficiary. According to Dictionary.com, beneficiary is a noun with two definitions.

“1. a person or group that receives benefits, profits, or advantages.
2. a person designated as the recipient of funds or other property under a will, trust, insurance policy, etc.”

In simple terms, if you die, your beneficiary (or beneficiaries) inherits your 401k plan assets.

Primary vs. secondary beneficiaries

In most cases, you’ll be asked to choose a “primary” and “secondary” beneficiary. The secondary beneficiary only comes into play if the primary dies before you do and you do not choose a replacement primary beneficiary.

Remember that your will does not overrule what you’ve listed as your 401k plan beneficiaries.

When you are first encouraged to open a 401k account and learn those 401k basics, you may be single and unmarried. In those cases, you’ll typically name your parents and/or siblings as beneficiaries. Most married people list their spouse as the primary beneficiary for their 401k account.

Before you quickly list someone as a beneficiary, there are a few things that you should consider.

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Do I have to list a beneficiary?

First, you are not required to list a beneficiary. If you die without one, the assets of the 401k will be distributed per your will.

There are disadvantages to doing that.

Among them, there will be the disadvantage of exposing the assets to probate and potential creditors. You also eliminate certain distribution options that could benefit your beneficiaries. However, there are cases where not listing a beneficiary would make sense. In complicated estates, that would require an attorney trained in that area of law.

Can I name a minor child as a beneficiary?

Many people list their minor children as beneficiaries. It’s understandable to want to take care of your kids if you die, but naming them as a beneficiary could cause a problem.

Ryan C. Edwards, a CFP® with CornerstoneShreveport.com, cautions parents, “By listing minors as beneficiaries, the assets do avoid probate; however, the minor children have access to the funds with no strings attached when they reach the age of majority (18-21 depending on state).

Most parents are not comfortable with the idea of an 18 year old having access to a windfall. Also, if you do want to list a minor child as a beneficiary of a retirement plan or IRA, be sure to list a guardian/custodian of the assets in estate planning documents.”

What should I consider before naming an adult child as a beneficiary?

You might also decide that an adult child who has trouble managing money shouldn’t be a direct beneficiary and have the money routed through a trust to control distribution. If your adult children are well off financially, you might want to skip a generation and list your grandchildren.

And, remember that you’re not limited to choosing relatives when picking beneficiaries. You even can choose charities and trusts if you want.

When can I/should I change my beneficiaries?

Your selection of beneficiaries is not permanent. You can change them when you want, but there are exceptions.

Ryan Edwards explains, “If you are married in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), your spouse generally must sign off on changing the primary beneficiary to anyone different from him/her.”

You’ll also want to revisit your beneficiaries after certain life events like getting married or divorced, when your children reach legal adulthood, or a beneficiary dies.

Can I specify how inherited assets are to be managed by the beneficiary?

When choosing a beneficiary, remember that once they receive the assets, they can do whatever they want with them. You cannot specify how the assets are to be managed unless you have a trust as the beneficiary.

In some cases, a trust will specify that the trustee should give a percentage of the trust account to one or more individuals each year. They can do what they want with that money but wouldn’t have access to the entire account.

As you can see, choosing a beneficiary for your 401k is an important decision, and like all important financial decisions, making a good choice can pay big dividends. Therefore, make sure you consider the options carefully and seek out appropriate professional advice.

Reviewed June 2019

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