He Gets, She Gets
He Gets, She Gets
James McGlynn Humble Dollar December 15, 2020
IF YOU DESIGNATE beneficiaries for your retirement accounts, that’s usually a surefire way to pass those assets directly to your desired heirs without going through probate—but not always.
Because those beneficiary designations are so important, you should verify your choices every year in case there’s a change due to, say, marriage, birth, divorce or death. Especially marriage and divorce. Which brings me to a crucial issue: When dealing with IRA and 401(k) beneficiary designations, there’s a key difference when it comes to your spouse.
In general, a spouse who hasn’t been named beneficiary of an IRA isn’t entitled to inherit it. Unlike 401(k) plans, IRAs aren’t governed by ERISA—the Employee Retirement Income Security Act—so these accounts don’t have the same protections for spouses.
You’re free to name whoever you wish as your IRA beneficiary, even if you’re married, provided you don’t live in a community property state. Indeed, IRAs are excluded from ERISA coverage, even if the funds originated in a 401(k).
By contrast, under ERISA, if the owner of a 401(k) account is married when he or she dies, his or her spouse is automatically entitled to receive 50% of the money, regardless of what the beneficiary designation says. If there’s no beneficiary listed, the spouse is entitled to 100% of the account.
The spouse can sign a waiver, giving up his or her 50% of the account, but only if the spouse is at least 35 years of age. It isn’t enough just to name someone else on the beneficiary form that your employer gives you. The waiver must be filled out, with the spouse consenting to the participant’s choice of beneficiary.
If your spouse signs the waiver, which should be provided by the firm that administers your 401(k), a plan representative or a notary public must act as a witness. Why all this bother? Congress wanted to make sure surviving spouses weren’t shortchanged. Beneficiary designations for 401(k)s become particularly tricky with divorces and remarriages.
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