Passing retirement accounts to loved ones

What to know

If you’ve written a will, you may think you’re done with your estate planning. But retirement accounts, such as IRAs and 401(k)s, aren’t governed by your will. While it’s not the most pleasant subject to think about, if you want your hard-earned retirement savings to pass directly to your loved ones, you must name beneficiaries for each of your accounts. This is especially important following divorce and remarriage, when the beneficiaries may not be as clear as you think. The rules governing retirement accounts can be confusing, so be sure to consult a qualified tax advisor. The points below are the most important ones to remember.

Rules for Employer-Sponsored Retirement Plans

If you’re single, you can name whoever you choose as the beneficiaries of your 401(k) or other employer-sponsored retirement plan. The account will automatically be passed on to whoever you name on the designation form, regardless of what your will says. If you’re married, you must name your spouse as the beneficiary, unless your spouse signs a document giving up his or her right to your account. In cases of divorce, provisions can be made in the divorce settlement to determine who is entitled to the money or how it will be split.

Your beneficiary will owe income tax on withdrawals from the account (unless it’s a Roth account). Individual plan rules may affect the distribution options available to your beneficiary, such as taking a lump sum, spreading withdrawals over five years or rolling the balance into an IRA. How and when withdrawals are made will affect the amount of income tax your beneficiary will owe.

Traditional or Roth IRA Rules

In general, if you have an IRA, you can name anyone you desire as a beneficiary. IRAs aren’t required to be passed on to a spouse. You should complete a beneficiary designation form as soon as you open your account so you don’t forget to name someone. You can amend the form to change beneficiaries at any time.

A spouse named as a beneficiary has more flexibility than other beneficiaries in deciding what to do with the account. Only someone who inherits an IRA from a spouse can treat it as his or her own, allowing the beneficiary to make contributions to it or roll it into another retirement plan. Generally, beneficiaries will owe income tax on distributions from traditional IRAs, but not Roth IRAs.

To learn more about naming beneficiaries on your retirement accounts and general estate tips, talk to an estate planning specialist at Chemical Bank. Call (800) 867-9757 or visit www.ChemicalBank.com to get started.