Dan Stewart, president of Revere Asset Management, stated that beneficiary designations in retirement accounts made poorly could end up costing your family tens of thousands or even hundreds of thousands of dollars if done incorrectly.
Social Security benefits have an automatic survivor benefit; however, retirement plans, like Individual Retirement Accounts (IRAs), require beneficiary designations. Federal law mandates that a spouse be named as the primary beneficiary of 401(k) plans and other pension plans, and that any additional beneficiaries must be chosen with the spouse’s waiver and approval.
As part of estate planning, identifying primary and contingent beneficiaries is essential. Retirement accounts that do not have designated beneficiaries will pass to your estate and go through probate.
Losing a loved one is a difficult experience, and dealing with their financial affairs can add to the stress. If your husband recently passed away, you might be wondering what happens to his 401(k) and what options you have. This guide will provide you with the information you need to understand your choices and make informed decisions.
Understanding Beneficiary Designations:
Your husband’s 401(k) plan likely has a designated beneficiary, which is the person or people who will inherit the account upon his death. This information should be readily available in his plan documents or through his employer’s human resources department.
Inheriting the 401(k) as the Spouse:
As the surviving spouse, you have several options for handling your husband’s 401(k):
- Become the Account Owner: You can choose to become the owner of the account and manage it yourself. This allows you to continue contributing to the account and potentially grow the funds for your future.
- Transfer to an Inherited IRA: You can transfer the funds into an inherited IRA. This allows you to manage the investments yourself and potentially avoid some taxes compared to keeping the money in the 401(k).
- Cash Out the Account: You can choose to cash out the 401(k) and receive the funds immediately. However, this option will trigger income taxes and potentially an early withdrawal penalty if you are under age 59½.
Important Considerations:
- Taxes: Regardless of the option you choose, you will be responsible for paying taxes on any distributions you receive from the 401(k).
- Required Minimum Distributions (RMDs): If you choose to keep the 401(k) in your name or roll it over to an inherited IRA, you will be required to take RMDs starting at age 72 (or 73 for those reaching 70½ after 2023).
- Beneficiary Designations: It’s crucial to update the beneficiary designation on your own retirement accounts to ensure your wishes are followed.
Additional Resources:
- Fidelity: What happens to your 401(k) when you die?
- Investopedia: Retirement: What Happens If a Spouse Dies?
Seeking Professional Guidance:
While this guide provides a general overview of your options, it’s essential to consult with a financial advisor or estate planning attorney for personalized guidance. They can help you navigate the complexities of your situation and make informed decisions about your husband’s 401(k).
Remember:
- You are not alone in this situation. Many resources and professionals are available to support you during this difficult time.
- Take your time and carefully consider all your options before making any decisions.
- By understanding your choices and seeking professional guidance, you can ensure your husband’s 401(k) is handled in a way that aligns with your financial goals and wishes.
Frequently Asked Questions:
1. What happens if my husband didn’t have a designated beneficiary?
If your husband didn’t have a designated beneficiary, the funds will likely be distributed to his estate. This could lead to delays and additional legal fees.
2. Can I use the money from my husband’s 401(k) to pay for funeral expenses?
Yes, you can use the money from your husband’s 401(k) to pay for funeral expenses without penalty.
3. What happens if I remarry?
If you remarry, your new spouse will not automatically become the beneficiary of your husband’s 401(k). You will need to update the beneficiary designation to reflect your new marital status.
4. Can I leave my husband’s 401(k) to someone other than a spouse or child?
Yes, you can leave your husband’s 401(k) to anyone you choose. However, it’s important to note that non-spouse beneficiaries will be subject to different tax rules and may not be able to stretch out distributions over their lifetime.
5. What if I have other questions or need further assistance?
Don’t hesitate to reach out to a financial advisor or estate planning attorney for personalized guidance and support. They can help you navigate the complexities of your situation and make informed decisions about your husband’s 401(k).
Additional Tips:
- Keep all paperwork related to your husband’s 401(k) in a safe place.
- Communicate your wishes to your family and loved ones.
- Review your own retirement plans and make any necessary updates.
Remember, you have options and support available. By taking the time to understand your choices and seeking professional guidance, you can ensure your husband’s 401(k) is handled in a way that honors his wishes and secures your financial future.
Roll Over the IRA
An additional choice is to take the assets and roll them into a personal IRA, either a newly created one or an existing one, without incurring early withdrawal penalties or paying income tax, unless you plan to take a distribution before the age of 59½.
If the assets in an inherited Roth IRA have been in the account for five years, you can roll over the account without incurring penalties. Only surviving spouses may use this rollover option, and they must transfer to the same kind of account (traditional IRA to traditional IRA or Roth IRA to Roth IRA).
“If the spouse rolls it into their personal IRA, they can update the beneficiaries and put off taking RMDs,” says Scott A. Bishop, CPA, PFS, CFP®, Executive Director of Wealth Solutions for Avidian Wealth Solutions.
Individual Retirement Accounts (IRAs)
You usually cannot include individual retirement accounts (IRAs) in your will. Therefore, you should fill out a beneficiary designation form when you open an IRA. This form identifies the recipient(s) of your IRA and the amount that each will receive. You may change the form at any time, but the money will go to the person listed on it when you pass away, even if that person is your ex-spouse or a disinherited child.
Your IRA beneficiary has five options.