If you fail to name any beneficiaries on your 401k account, the account will pass to your estate at your death. If you fail to name both a primary and contingent beneficiary, and your primary beneficiary predeceases you, your 401k will also pass to your estate because of failure to name a contingent beneficiary. There are several reasons you don’t want this to happen.
First, most people don't want their 401k proceeds to pass through probate because probate involves attorneys’ fees, court costs, delays in distribution of the inheritance to your intended beneficiaries, and a public record is created regarding the assets in your estate. Also, if a beneficiary inherits your 401k through your estate because you failed to name beneficiaries on the account, the beneficiary will lose the opportunity to spread out distributions over a longer period of time and benefit from tax deferral. Even worse, if you fail to make a will and fail to name beneficiaries on your 401k, your 401k will pass to your legal heirs through the laws of intestate succession, which means the 401k may not even pass to the beneficiaries you want to inherit your retirement funds. See dying without a will.
Benefits of an IRA Rollover
If you have a 401k account from a previous employer, you should consider opening a rollover IRA and transferring the proceeds of your 401k to the rollover IRA account where your investments can continue to grow tax deferred. Before taking any action regarding a 401k rollover to an IRA, consult a financial planner that understands your unique situation, your retirement goals, and your estate planning objectives.Some of the reasons you may benefit from moving your 401k account to a rollover IRA include:
It is much easier to manage a single IRA than multiple 401k accounts, especially when reviewing asset allocation, changing investments, calculating minimum required distributions, reviewing account statements, evaluating investment performance, and filing tax returns.
Most IRAs offer a much wider choice of investment options, including more ETFs, mutual funds, and stocks to choose from, than the average 401k plan. If you have a 401k account invested with a former employer, compare the investment choices within that account to those that are available in an IRA with a major brokerage firm.
In terms of ease of withdrawal and tax withholding, taking your money out of an IRA account you control is much easier than taking your money out of a 401k account controlled by your former employer.
Many brokerage firms offer free or low cost financial planning advice to their IRA holders. 401k plans are not designed to offer comprehensive financial planning advice to former employees.
Leave a Tax Free Inheritance to Children
If you want to leave a tax free inheritance to your children, grandchildren or other beneficiaries, find out if your employer offers a Roth 401k option. You can contribute part of your paycheck to the Roth 401k account on an after tax basis and allow it to grow tax free. Your beneficiaries may receive the inheritance of your 401k tax free, provided certain requirements are met.
Reasons to Stay in Your 401k Plan
1. If you have not reached the age of 59 1/2 and are planning to use the Rule of 55 by retiring between age 55 and age 59 1/2 and withdrawing money from your 401k account without paying an early withdrawal penalty, you may want to keep the funds in your old 401k account. 2. If there are great investment choices in your 401k plan which are not available in an IRA, you may want to keep the old 401k account. For example, if your former employer offers a guaranteed investment contract or GIC or mutual funds that are closed to new investors or not offered outside the 401k plan, you may be more comfortable staying in the 401k plan. If your 401k plan offers a low risk investment choice with a guaranteed rate of return that exceeds current CD rates, it may be a compelling reason to keep your funds in the 401k as long as the plan allows, rather than doing a rollover. Use financial planning software to analyze how well your 401k investments and other accounts have performed in the past.
3. If you are concerned with asset protection and creditor claims, consult an asset protection attorney before transferring funds from an old 401k to an IRA. Creditors rights to IRA funds vary based upon state law. The best way to ensure your retirement funds are protected from creditors is to understand the laws of your state regarding funds held in an IRA.Before deciding to stay in an old 401k plan, be sure you have examined your overall goals for the funds in the account and make sure the 401k plan allows you to achieve those goals. If you are not planning to use the 401k money for your own retirement, but plan to leave it to a spouse, child, grandchild or other relative as an inheritance, the 401k plan may not be the best vehicle for estate planning.
Spouse's Right to Inherit Your 401K
Your surviving spouse is entitled by law to inherit the funds in your 401k account. Therefore, you cannot disinherit your spouse from your 401k simply by naming another individual as beneficiary or putting disinheritance language in your will. However, if your spouse signs a properly executed written waiver agreeing to allow you to name another beneficiary on the account, you can leave your 401k to someone else. If you live in a community property state, see our community property page for information about your spouse's rights in your 401k.
How to Rollover a 401K to an IRA
Once you make the decision to transfer your 401k assets to a rollover IRA, get instructions from your IRA custodian about how to properly complete the rollover. There are several important steps that must be followed and important issues to consider. For example, the preferred method of completing the transfer is by a trustee to trustee transfer, so you want to ensure the check from your 401k plan is not made payable to you.
It is possible some of the investments in your 401k may be eligible to roll over in kind, allowing you to keep them in your IRA. Check with a representative of your IRA custodian to determine if any of your 401k investments can transfer in kind. Otherwise, the investments in your 401k will be liquidated and transferred to your IRA in cash or money market funds.
If you own company stock in your 401k account, consult a financial planner about the benefits of net unrealized appreciation or NUA and whether NUA is something you should take advantage of when transferring your assets out of the 401k account. Using NUA can only be done at the time of rolling assets out of your 401k account, not after, so if you don’t elect to use it at the time of transfer, the opportunity is lost.Also, if you may need to take a loan from a 401k account with your current employer, you may want to roll over your old 401k account to your new employer’s 401k account for purposes of borrowing against your 401k account balance. If you may need a 401k loan, discuss this with a representative of your current 401k administrator for information about the amount of loan that may be available and other pertinent information.
Retirement Accounts and Your Estate Plan
For a list of reputable guides on retirement, legacy planning, and your estate, see estate planning books.
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