Typically, retirement plans require that you designate a beneficiary who will receive the asset when you pass. Such assets are considered ‘non-probate’ assets because they pass directly to the named beneficiary, thereby avoid the probate process. However, when choosing your retirement plan beneficiary it’s important to understand the rules on how your spouse will be treated under 401(k) and IRA plans.
401(k)s and IRAs differ in how they treat a surviving spouse. With a 401(k) plan, a surviving spouse is the automatic beneficiary of the plan. If you want to name someone other than your spouse as a beneficiary, your spouse must agree to this in writing. This rule might not apply if you and your spouse have been married for a very short time, but in general, it’s a strict rule. In fact, even if your spouse signed a prenuptial agreement saying that he or she has no right to your 401(k), this rule could still prevail because he or she wasn’t your “spouse” at the time of the signing.
On the other hand, surviving spouses are not automatic IRA beneficiaries. In order to make your spouse your IRA beneficiary you must specifically name them as such. This is also a rather strict rule.
For example, in one recent case, a husband rolled his 401(k) into an IRA after he retired, naming his children as the IRA’s beneficiaries. After he died, his wife claimed that she was entitled to the account funds as his surviving spouse and that because her husband had rolled his 401(k) into the IRA, she should receive the same protections that the 401(k) had given her.
But a federal appeals court disagreed, deciding that the IRA rules applied even if the funds originated in a 401(k). Therefore, she lost her right to the 401(k), which was distributed to her husband’s children as part of his IRA.
Whether you have a 401(k) or an IRA, regularly updating your beneficiary designations to make sure they conform to your wishes is an important element in maintaining an effective estate plan.