How
Will Your Spouse be Treated?
When
choosing a beneficiary for a retirement plan, it is important to
understand how your spouse will be treated under the plan. Surviving
spouses are treated differently under 401(k)s and individual retirement
accounts (IRAs). While a 401(k) provides protections for a surviving
spouse, an IRA does not.
Spouse
Automatic Beneficiary in most 401(k) Plans
Because
the 401(k) is an employee-based retirement system, it is governed by a
federal law, the Employee Retirement Income Security Act of 1974
(ERISA). Under ERISA, a surviving spouse is usually the automatic
beneficiary of a retirement plan (There may be some exceptions. For
example, the spouse may have to be married to the employee for a
certain amount of time). The spouse must consent in writing if the
employee wishes to name someone else as the beneficiary.
IRAs
allow the freedom to choose Beneficiary
IRAs,
on the other hand, are not governed by ERISA, so they do not include
the same protections for spouses. This is true even if a 401(k) is
rolled into an IRA. In a recent case, (U.S. Ct. App., 9th Cir., No.
07-15261, Jan. 22, 2010) a husband rolled his 401(k) into an IRA with
Charles Schwab & Company after he retired. He named his
children as the IRA's beneficiaries. After he died, his wife claimed
that she was entitled to the account funds as his surviving spouse. She
argued that because her husband rolled his 401(k) into the IRA, she
should receive the same protections that the 401(k) gave her. The court
disagreed, finding that the IRAs are excluded from ERISA coverage even
if the funds originated in a 401(k).
Spouse
as IRA Beneficiary
If
you have an IRA and want your spouse to be its beneficiary, you have to
specifically name the spouse as a beneficiary. If you have a 401(k) and
want your spouse to be the beneficiary, you should still fill out a
beneficiary designation form, naming your spouse. And if you roll it
over into an IRA, make sure you fill out a new beneficiary designation
form. If you want someone other than your spouse to be the 401(k)'s
beneficiary, you will need the spouse's consent in writing, as noted
above.
Trusts
as Beneficiaries
One
important estate planning technique is to name a Trust as an
alternative beneficiary. This gives you the ability to allow the IRA to
have beneficiaries with the protection of a trust rather than
receiving it outright. This prevents creditors of
beneficiaries, spouses of beneficiaries and others from
taking the IRA proceeds.
Whether
you have a 401(k) or an IRA, it is important to regularly check your
beneficiary designations to ensure they are current and are what you
want!
Call me
at (856)
665-2121 today!
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