Retirement plan decisions made easy
Lesson 8: Death and Divorce
Unfortunately, death comes to us all and divorce is pretty frequent. This discussion is important because 401k law is very different from common law. Please treat this information as a general guideline, and seek advice from a qualified attorney before taking significant actions with regard to estate planning or divorce. Death and divorce cause numerous challenges. Make sure to read the full chapter so that you are fully informed on what to do during these times.
Who gets your 401k when you die? In most cases your will is irrelevant to determining who receives your 401k after you die. Under federal law, the spouse is almost always made the recipient. In most situations this works perfectly, but if you’d like a different beneficiary named, your spouse must sign a form consenting to the change in beneficiary. As your will is unimportant here, make sure you have your 401k worked out so that it will be left to the correct person.
Drill Down: Who Gets Your 401k When You Die
How does your beneficiary get your 401k? Your spouse will receive your 401k after you die (assuming you haven’t designated another beneficiary) with all tax advantages intact. But just because the IRS allows certain tax advantages doesn’t preclude your employer from having more restrictive rules within those IRS guidelines. For example, while the IRS may allow widowed spouses to keep their money in the 401k for a while, your specific plan may not.
Drill Down: How Your Beneficiary Gets Your 401k
If your spouse is the beneficiary, he or she will be able to roll the funds over into an Individual Retirement Account. You’ll need to know your plan’s details (like whether it has a minimum withdrawal requirement for the widowed spouse). Regardless of the specifics, the most important thing for the surviving spouse to remember is not to take the cash and then later move it into an IRA. Transfer the money directly.For beneficiaries other than the spouse, it’s even more vital to check the plan’s rules. These beneficiaries cannot roll the 401k money over into an IRA, and the plan administrator may require that all the funds be withdrawn in one lump sum, even though the IRS allows a much longer time frame for withdrawal. This highlights yet another good reason to roll your 401k over into an IRA when you retire. The lesson with divorce is simple: Your 401k may be a joint asset. This is not the time to be stingy with lawyers’ fees—make sure to get someone who handles this kind of thing every day. You and your spouse can negotiate pretty much anything you want, but yet again, what is allowed by your individual plan can vary.
Drill Down: Divorce
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Lesson 1: What the Heck is a 401k, and What’s So Great About It?
Lesson 2: Contributions to Your 401k
Lesson 3: Investments “Cook Book” Approach
Lesson 4: Investments: How Investments Work
Lesson 5: Loans and Hardship Withdrawals from Your 401k
» Lesson 8: Death and Divorce
Lesson 9: Your 401k, Your Other Assets, and Your Life
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