When Should You Name a Trust as the Beneficiary of Your 401k/IRA?
Defined contribution plans account for an increasing share of American retirement savings. The United States Bureau of Labor Statistics (BLS) reports that the majority of workers now contribute something to a defined contribution retirement plan. Tax-advantaged defined contribution plans—such as 401(k)s and IRAs—can help people get the most out of their savings.
When you are crafting an estate plan, it is important to consider tax-advantaged retirement accounts. You may be wondering: Who should you choose as a beneficiary for your 401(k)/IRA? The answer depends on your situation and your objectives. Here, our San Diego estate planning attorney discusses the key things to know about selecting a beneficiary for a 401(k) or IRA.
401(k)s, IRAs, and Beneficiary Designation
Who you should select as your beneficiary for your tax-advantaged retirement plan depends on a few different factors. To start, it is important to understand your obligations under federal law;
- 401(k): The Employee Retirement Income Security Act of 1974 (ERISA) holds that the surviving spouse has an automatic right to a 401(k). In other words, if you are married, you should name your spouse as the primary beneficiary on your 401(k). You can then name a contingent beneficiary in case you outlive your spouse. If you would like to name another party—perhaps your children—as your primary beneficiary, you will need your spouse to sign a written waiver. If you are not married, you can select any person as your primary beneficiary for your 401(k). You do not have to be related.
- IRA: The federal regulations are different for Individual Retirement Accounts (IRA), including Roth IRAs. A surviving spouse has no assumed right to inherit proceeds of an IRA under federal law. In other words, you are not required to name your spouse as the primary beneficiary on your IRA. You can select another party, even if you are married. Of course, married people can (and most do) name their spouse as a primary beneficiary on an IRA.
There May be Advantages to Naming a Trust as a Beneficiary of a 401(k) or IRA
You are not required to name an individual as a beneficiary for your tax-advantaged retirement account. In some circumstances, you may be better off listing a trust as a primary beneficiary of your 401(k) or IRA. While more complicated, a trust can make sense in a number of different circumstances, including when:
- You want to name a minor child a beneficiary;
- You have many beneficiaries, such as a blended family; or
- You want to put certain limitations on a beneficiary’s access.
Schedule a Confidential Consultation With a San Diego, CA Estate Planning Lawyer
At The Law Office of Kris Mukherji, our California estate planning attorney has legal and financial expertise that you and your family can rely on. If you have any questions about tax-advantaged retirement accounts and beneficiary designations, we are more than happy to help. Contact our law firm today to arrange your strictly confidential initial consultation. Our estate planning team provides legal representation in San Diego, La Jolla, National City, and Chula Vista.