The Rules for Passing Retirement Accounts to Loved Ones

retired couple with family

So you’ve written your will. Congratulations, you’re done with your estate planning. Or are you?

Not so fast. You also need to make sure your hard-earned retirement savings go to the people you love...and ensuring that happens requires some additional care in your planning,

The rules about how retirement accounts, such as IRAs and 401(k)s, can be passed to your heirs and beneficiaries are different from rules governing other types of assets. These rules can be downright confusing, which is why you should consult a qualified financial professional to advise you about your own situation. The points below are the most important ones to remember.

Rules for Employer-Sponsored Retirement Plans

If you’re single, you can name anyone as the beneficiary of your 401(k) or other employer-sponsored retirement plan. The account will automatically be passed on to your named beneficiary/beneficiaries, regardless of what your will says. Just be sure you have named this beneficiary or beneficiaries on the beneficiary designation form attached to your account.

If you’re married, you must name your spouse as the beneficiary, unless your spouse signs a document giving up his or her right to your account. In cases of divorce, provisions can be made in the divorce settlement to determine who is entitled to the money or how it will be split. However, if you're divorced and you do not want your former spouse to have those funds, make sure you change your beneficiary designations on these retirement accounts as soon as your divorce is finalized. 

Your beneficiary will owe income tax on withdrawals from the account (unless it’s a Roth account). Individual plan rules may affect the distribution options available to your beneficiary, such as taking a lump sum, spreading withdrawals over time, or rolling the balance into an IRA. How and when withdrawals are made will affect the amount of income tax your beneficiary will owe.

Rules for Traditional or Roth IRAs

If you have an IRA, you can usually name anyone you desire as a beneficiary. IRAs aren’t required to be passed on to a spouse. You should complete a beneficiary designation form as soon as you open your account so you don’t forget to name someone. You can amend the form to change beneficiaries at any time.

A spouse named as a beneficiary has more flexibility than other beneficiaries in deciding what to do with the account. Only someone who inherits an IRA from a spouse can treat it as his or her own, allowing the beneficiary to make contributions to it or roll it into another retirement plan. Generally, beneficiaries will owe income tax on distributions from traditional IRAs, but not Roth IRAs.

 

We can help you manage retirement planning, including resources for estate planning. To set up a free, no-obligation consultation with a financial consultant, make a request online or contact Hanscom Investment Services at 800-656-4328 ext. 2236.†

Schedule a free consultation   with Hanscom Investment Services

†Securities and advisory services are offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. Hanscom Federal Credit Union is not registered as a broker-dealer or investment advisor. Registered representatives of LPL offer products and services using Hanscom Investment Services, and may also be employees of Hanscom Federal Credit Union. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, Hanscom Federal Credit Union. Securities and insurance offered through LPL or its affiliates are:

Not Insured by NCUA or Any Other Government Agency / Not Hanscom Federal Credit Union Guaranteed / Not Hanscom Federal Credit Union Deposits or Obligations / May Lose Value

 

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