Naming A Beneficiary For Your Retirement Account

Are you married?

Federal law requires you to designate your spouse as the beneficiary for your 401(k) unless your spouse has signed a written waiver. Unlike a 401(k) plan, you aren’t required to name your spouse as the beneficiary of your IRA (unless you live in a community property state, see IRS Publication 555 here for a list of those states). In addition, your IRA custodian may also require you obtain a spousal waiver consent if your spouse is not your primary beneficiary.

Regardless of the law, spouses are most often named as the IRA beneficiary. And for good reason. It is best to name your spouse as your primary beneficiary because this will stretch out the payment of taxes over the lifetime of your spouse. Otherwise, the entire account would normally have to be paid out over five years.

In addition, only a spouse beneficiary can assume ownership of the IRA and retain the same rights and privileges of the original owner. All other beneficiaries will trigger some form of distribution. Some of these automatic distributions will generate more taxes in a shorter time frame than others.

Does your spouse already have adequate financial resources without including your IRA?

There may be circumstances when it makes sense to bypass your spouse and name another beneficiary. Choosing this course does have some consequences, but it’s possible to have the best of both worlds.

If the spouse has enough other resources and does not need the money in the retirement plan, it might make sense to name the children as primary beneficiaries. When a child inherits money from a retirement plan, he or she can roll it into an inherited IRA. These inherited IRA accounts require a distribution to be made each year to satisfy IRS ‘required minimum distribution’ rules, referred to as ‘RMD.’ The owner of an inherited IRA is required to take an RMD each year no matter what age – not at age 72 as with a traditional IRA that you did not inherit.

You needn’t omit your spouse’s name from the beneficiary list, though. The spouse can still be named as the primary beneficiary, with the children listed as contingent beneficiaries. This offers the advantage of delaying the bypass decision until the spouse stands to inherit the IRA. At that time, if the spouse feels it’s better for the kids to inherit it, the spouse can “disclaim” the IRA. (This must be done in writing.) The IRA would then go to the contingent beneficiaries (e.g., the kids).