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 will likely fund more than just your future.
Make sure it goes where you want when you pass on. Choose (and regularly review) a beneficiary for your 401(k) and IRA plans.
What is 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.
How should I choose a beneficiary?
It’s pretty easy: Choose who and what matters most to you. “Think about your values when determining how you want to leave a legacy,” says Joe Swanson, a financial services representative for Principal® in Minnetonka, Minnesota. "Retirement accounts are among most investors' largest assets. 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
1. Pick people you want to provide for (and review regularly).
A spouse, a child, a nephew—take care of the ones you love most. Then revisit your decision when a big life change happens, like divorce, remarriage, birth, or death. Swanson recommends reviewing your designations every few years.
2. Think about asset protection.
Consider a trust if you want more customization around 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 also help minimize your estate tax liability.
3. Designate a custodian for minor children.
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 sharing with 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,” says Swanson. If you designate a charity to inherit your savings, check periodically to make sure it's still operating as a non-profit organization.
5. Don’t rely on the default.
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. Leave a legacy you can be proud of.
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.