You work hard to build your savings. Protect what you’ve built by making sure your savings go to the retirement beneficiary you choose.
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.
You wouldn't take a chance on who inherits your home—why would you do that with your retirement savings?
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 Stanley Poorman, financial professional with Principal®. “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 beneficiary for your 401(k) and other retirement accounts
1. Choose 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. Poorman recommends reviewing your beneficiary designations every year.
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 an inheritance is distributed. Trusts may also help minimize your estate tax liability.
Tip: To change your beneficiaries for Principal, . On your dashboard, click on each account name (i.e., defined contribution, defined benefit, etc.), then "Overview." Scroll to "Beneficiaries." If you're on the mobile app, click on each account, then on the three horizontal lines in the top right corner; you'll find "Beneficiaries" there.
3. Designate a custodian if you’re naming a minor as your 401(k) beneficiary.
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.
“Some people name a church, school, or community organization as a beneficiary on part of their money and life insurance proceeds,” Poorman says. (If you’re married, you may need your spouse’s signature.) Giving to a nonprofit through a beneficiary designation may also have tax benefits.
Tip: When naming a beneficiary, it’s also important to understand how assets will pass if your beneficiary passes before you do. There are two types of beneficiary designations to consider:
- “Per stirpes” means assets would pass to your deceased beneficiary’s heirs.
- “Per capita” mean assets could have the unintended consequence of disinheriting your predeceased beneficiary’s heirs.
5. Don’t rely on the default retirement 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—review existing accounts yearly and name beneficiaries for new accounts right away.
What’s next?
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