senior man and woman using tablet

6 Frequently Asked Questions About Retirement Accounts

As you manage your end-of-life plans, you may have a number of critical questions about your retirement accounts. Does a 401K have to go through probate? What about other types of retirement accounts? What happens to the money in those accounts after your death? Take a look at some of the most frequently asked questions related to retirement accounts and estate planning.

1. Does a 401K have to go through probate?

When you set up your 401K, you probably had to designate beneficiaries: people who would receive those funds if something happened to you. Ideally, you should designate both primary and alternate beneficiaries in case something happens. For example, if you designate your spouse as the primary beneficiary, you might want to designate your children as alternate beneficiaries in cases something happens to both you and your spouse at the same time, or something happens to your spouse before the date of your death.

If you have set up those accounts properly, with clearly-designated beneficiaries, your 401K account will not have to go through probate.

2. If I named one person as the beneficiary on my 401K account, but changed my mind and want to designate someone else while writing my will, will my will take precedence?

Your will cannot change the directives already named on your 401K account. If you have a beneficiary listed on that account, but change your mind–perhaps you divorced the person you were married to when you set up that account, for example, and do not have any legal arrangement as part of the divorce decree that designates that you must leave part of that account to your former spouse–you will need to change your 401K beneficiary directly, rather than relying on your will to take care of it for you. The beneficiary named directly on your 401K will override any directives that you set out in your will, even if the will is the more recent document.

3. What happens if I did not name a beneficiary on my 401K or retirement account? 

If you did not name a beneficiary on your retirement account, your 401K will be distributed to your heirs, based on the terms of your will. The funds in that account will become part of the estate and can be taxed accordingly. However, the funds from that account will not be used to pay your final bills before passing to your heirs, unlike other funds in the estate at the time of your death.

4. Are other retirement accounts handled the same way as a 401K? Do they have to pass through probate?

Most retirement accounts, regardless of the type of account you opened, will have you designate beneficiaries. That includes IRAs, 403Bs, and other types of retirement accounts. Those funds are intended to be set aside for a long time: until your retirement, which will typically be decades after you open the initial account. Once you set up the beneficiaries on that account, your beneficiaries can use those designations to help bypass probate on those funds. As a result, they can get those funds in their hands sooner–which can offer immense benefits in the event of your untimely death, including providing your heirs with the money they need to take care of immediate expenses.

5. What happens to my retirement accounts when I die? 

When someone who holds a retirement account dies, the financial institution that hosts the accounts will pass the assets to the named beneficiaries in the account. They will pass directly to the beneficiaries, without going through probate or becoming a direct part of the estate. However, the person that inherits those funds may, in some cases, have to pay taxes on them. It’s important to carefully consider what taxes your beneficiary may have to pay and how that may impact them ahead of time.

If you have not named a beneficiary, or you name your estate as the beneficiary of your retirement accounts, the funds will pass into the estate, where they will be used to settle your final debts and handle many of your last expenses.

6. What should I do if I inherit a retirement account?

When someone you love passes away, you may wonder about your next steps and what to do with the funds you inherit. If you inherit a 401K or other retirement account, you may have a couple of options. First, you can take a lump sum distribution on the account, which may require you to pay any associated taxes on that account immediately. You may also choose to spread that withdrawal over several years (10 years, if the owner of the account dies after 2020; five years, if the owner of the account died before that date) so that you can alleviate some of the tax burden or spread out spending reasonably. You may also have the right to spread withdrawals out over your lifetime, depending on your needs and the amount of money in your account.

Finally, if you are the spouse of the deceased, 401K benefits–and those in other retirement accounts–are assumed to be community property unless they have been assigned otherwise. Most states, in fact, will require you to sign a waiver in order for your spouse to designate another beneficiary for his retirement accounts. If your spouse dies, you may choose to roll over the funds from that 401K into your own retirement account. Once it’s there, the government will treat those funds as though they have always been yours, so you won’t have to pay any taxes on the money until you withdraw it after you retire.

Managing your retirement accounts is just one important part of estate planning. There are many factors that may go into the distribution of your final assets and how you want to handle those needs. Do you have more questions about estate planning or how to ensure that your beneficiaries receive the maximum benefit from their inheritance? Contact us today for more information.

Leave a Comment

Your email address will not be published. Required fields are marked *