Leave a legacy you can be proud of: 5 considerations for choosing retirement beneficiaries
You work hard to build your retirement savings. And that money may fund more than just your future.
To stay in control of where it goes when you pass on, it’s important to choose (and regularly review) a beneficiary for your 401(k) plans and IRAs.
What’s a beneficiary?
Beneficiaries are the people (or entities, like a trust or group) who receive your retirement funds when you die. Choosing a beneficiary is important because it’s typically who your money goes to first—even if your will says otherwise.
It really comes down to who and what matters most to you. “Think about your values and how you want to leave a legacy,” says Joe Swanson, who helps people with financial planning for Principal® in Minnetonka, Minnesota. “A retirement account may be your biggest asset. You wouldn't take a chance on who inherits your home—why would you do that with your retirement savings?”
5 things to consider when naming a retirement beneficiary
You wouldn't take a chance on who inherits your home—why would you do that with your retirement savings?”
Joe Swanson, financial professional
1. Pick people you want to provide for (and review regularly).
A spouse, child, niece, or caretaker—designate the ones you love most or who would benefit from your help. Then revisit your decision when a big life change happens, such as divorce, remarriage, birth, or death. Swanson recommends reviewing your designations every few years.
2. Think about asset protection.
Consider a trust if you want to customize how your money goes to beneficiaries. It protects your assets (things like retirement investments and even property) by letting you plan when and how inheritances are distributed. Trusts may also help minimize your estate tax liability. Learn more about the benefits of a trust.
3. Naming a minor as your beneficiary? Designate a custodian.
If you name a minor (generally someone under 18) as your beneficiary, designate a custodian. This person manages the child’s inheritance until they reach a certain age. If you don't, the state may decide for you, and the custodian could end up being someone you wouldn't have chosen.
4. Consider leaving money to a charity or organization.
“Many folks name a church, a school, or a community organization as a beneficiary on part of their money and life insurance proceeds,” Swanson says. If you designate a charity to inherit your savings, check periodically to make sure it's still operating as a nonprofit organization. You can check the status of a charity at charitynavigator.org. (If you’re married, you may need your spouse’s signature.)
5. Don’t rely on the default beneficiary.
If you don't name a beneficiary, retirement funds in 401(k)s and IRAs generally go to your spouse—even if you meant to leave the money to someone else. If you're single, your retirement funds could go directly to your estate, which means the courts would determine how they should be distributed. And that could be a long, expensive process.
Make beneficiary reviews a regular part of your financial planning—reviewing those for existing accounts yearly and setting them up for new accounts right away.
Joseph Swanson, Principal Securities, Inc. Registered Representative and Investment Adviser Representative.
Beneficiary designations are legal designations that are needed whenever a qualified retirement plan provides benefits to beneficiaries of deceased participants. They state who is to receive the benefits and how benefits are to be paid in the event of a plan participant’s death. Certain beneficiary designations cannot be completed online. Instead, a paper form must be completed and signed. If needed, you will be given the option to print the paper beneficiary form from the website. Based on your marital status, your designation may require spousal approval.