Name That Beneficiary!

In my last post I gave a little teaser about non-probate assets; property that goes straight to a person upon your death. For now I will discuss the first of what are probably the two most common of these: retirement accounts. Many of you that have a job with good benefits, or watch a lot of Suze Orman, probably have some type of retirement account. There are two common types: IRAs (Individual Retirement Accounts) and 401(k) accounts (or 403(b) if you work for a nonprofit). Here is how they work.

IRAs can be opened at most financial institutions and credit unions. There are two types of IRAs: Traditional and Roth. The difference between the two? For a Traditional IRA, annual contributions are tax deductible up to a certain amount, and when you reach retirement age, you pay taxes on the money upon withdrawal. A Roth IRA, on the other hand provides no deduction for contributions, but the money is withdrawn tax free upon retirement, plus the income in the account accumulates tax-free so long as contributions stay in the account for 5 years. Sweet! You, Mr. or Ms. Singleperson, can name whomever you like as your beneficiary with no restrictions! Upon your death, the funds are payable to whomever you name. If you don’t name someone, the money becomes part of the probate estate. If you were to make your mother happy and marry that guy or gal you have been shacking up with for 7 years…you can name whomever you choose, but beware: there is a restriction if you live in a community property state. A community property state treats any money earned or property acquired by either spouse during the marriage, to belong to both spouses. If any of the money in your IRA was contributed while you were married and you live in a community property state, your spouse owns half. Community property cannot be transferred without the other spouse’s consent. Community property states are: Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Therefore, before you take the plunge, I would meet with a lawyer in your state and ask how holy matrimony will change the ownership status of all your property. There is only one place in which an unmarried person has to fret about this…you guessed it…California! In the Golden State, registered domestic partners are allowed to own community property. Consider that before you register domestically…

And now on to the 401(k). An employee can divert a portion of their salary up to a certain amount to a 401(k) account. The beauty of these accounts are that they use pre-tax dollars, which reduces your tax liability and allows you to get some money back from Uncle Sam in many cases. If you fail to name a beneficiary, your 401(k) will become part of your probate estate. If you name a beneficiary, it won’t. There is a special inheritance rule with regard to 401(k) accounts. Singles may name whomever they like as the beneficiary, but married people must name their spouse unless the spouse signs a waiver. The idea is to prevent a greedy person from forgoing their spouse and leaving their retirement savings to their mistress or the pool boy they have been sleeping with.

A special note to divorcees: be sure to take your ex’s name off your beneficiary form when you divorce! A divorce decree will not – I repeat – WILL NOT prevent an ex-spouse from inheriting your IRA or 401(k) account when you kick that proverbial bucket! These are accounts governed by federal law and your hard-earned retirement scratch will go to whoever’s name is on the form!

So a person can avoid having their retirement accounts included in probate simply by filing out a form at your job or bank indicating who gets the money when you die. A note to the lazy…fill out the damn form, will ya!

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