Why Keeping Up with Beneficiary Delegation Matters
When most Americans think of retirement savings, we think of a 401(k). These days, most stable, full-time jobs offer some kind of retirement plan to their employees in addition to other benefits such as heath insurance. Instead of being a far-off, get-to-it-later objective, with a 401(k) working people are able to earn now while saving up a big nest egg for later, helping make the often stressful process of budgeting for retirement more manageable. First put forward in 1980, the 401(k) is named after the section of U.S Internal Revenue Code that first delegated it's parameters. It allows employees to make contributions automatically, and allows employers to contribute as well (typically matching part of their employee's contribution). And since they (401(k) retirement plans) are tax-advantaged, working people don't need to worry about being taxed until after they begin to withdraw that money. Employees are often asked to designate a beneficiary in case anything were to happen to them, or they died before being able to spend all of the money. And here is the crux of the issue.
It's extremely common for people to name a child or spouse as a beneficiary to their 401(k). After all, it makes sense to want to able to financially support a loved one after your passing. However, it is also extremely common for people to forget about updating their designation, even after a major event like the death of a loved one or a divorce. And what's worse, typically a Will CANNOT override a predetermined beneficiary designation. That means that all that money you've been stockpiling for 25+ years is still goes to your ex, even if you haven't been married to that person in 20 years. AND, if your beneficiary dies before you, there's a possibility your IRA could go into probate, which would be costly to your estate. Not quite what you and your loved ones want, right?
I don't want that for me and mine, and I'm sure you don't want that for you and yours. So, what can you do about it?
One of the simplest ways to avoid the aforementioned pit-falls is simply to check who your designated beneficiaries are and update them as necessary. In most cases the process of updating a beneficiary is simple and easy. Depending on the retirement plan that you have with your employer, there are specific instances in which you are able to change your designation, so check your plan as well to make sure you are able to make the changes you want. In most instances it's as easy as a simple online change, though it's possible paperwork and signatures will be involved. Still, a few pages of paperwork in order to secure the financial security of those you love is well worth it, in my opinion.
Something to Consider
It's always important to think wisely when choosing a beneficiary for anything, but especially with a large sum of money. While it is natural to want to take care of our children, for instance, there are some realistic questions we need to ask ourselves. Will my child be responsible enough to not recklessly spend this money? If not now, when? Would it be wise to put it in a trust instead? Conversely, when naming a spouse or someone who may already have substantial income, there is the possibility of forcing that individual into a higher tax-bracket. I don't want to scare you with these considerations. I just want to give realistic possibilities to consider so you can make the best possible decision when naming a beneficiary.
My final suggestion would be to not just stop with your retirement plan. You should also check things like life-insurance policies and banks accounts to be sure that all your assets go to the right places when your time comes.