How do I choose a 401(k) beneficiary?

When you set up your Guideline 401(k), you’ll be asked to designate a beneficiary – someone who will inherit your 401(k) distributions if you pass away.

Although a beneficiary designation isn’t mandatory, if you’re particular about who will inherit your hard-earned money and want to spare them a lot of hassle, you should take the time to designate your beneficiary(ies) today.

Keep on reading to learn more about different types of beneficiaries, including primary and contingent beneficiaries and minor, trust, or non-individual beneficiary designations.

Primary Beneficiary

If you’re married

Your spouse is presumed to be your primary beneficiary by default. If you want someone else to be named as the primary beneficiary, your spouse must provide written consent for the designation to be effective.

If you’re single

You may select anyone as your beneficiary (e.g. your parents, siblings, or that favorite niece of yours). However, if you get married later on, your spouse takes precedence over your previously designated beneficiary and automatically becomes your primary beneficiary. This means that if you want to keep your original beneficiary, your spouse must provide a written waiver for it to be valid.

Contingent Beneficiary

In addition to your primary beneficiary, you can also list a “back-up” beneficiary – a contingent beneficiary who will be next in line to inherit your 401(k) account if your primary beneficiary doesn’t survive you. Designating a contingent beneficiary helps you ensure there’s always someone in line to inherit your 401(k), even if you forget to update your designated beneficiaries over the years.

Multiple Beneficiaries

Guideline enables you to allocate among multiple primary or contingent beneficiaries. For example, if you list your two favorite nieces as your primary beneficiaries, you have the option of allocating 60% to your most favorite niece, and 40% to the other.

No Beneficiary

If you don’t name a beneficiary, or if none of your beneficiaries survive you, your account will be distributed in the following order:

  • Spouse
  • Children (split equally)
  • Parents (split equally)
  • Your estate

Minors

You can also name a minor as a beneficiary – but it’s not recommended. If the minor beneficiary has not turned 18 by the time they inherit your 401(k), a court of law will have to appoint a guardian to receive the money on their behalf.  

If you’ve ever been in a court proceeding, you’ll understand legal processes can be lengthy and costly, which could significantly delay the minor’s (and other designated beneficiaries’) receipt of funds.

A better alternative is to name a spouse or other trusted guardian as the beneficiary, with the understanding that they’ll use the funds for the minor’s benefit.  If the minor turns 18 in your lifetime, you can update your beneficiary accordingly.

Living Trust Beneficiary

You might also want to create a living trust and name the trust as your beneficiary.

A common practice is to set up a trust for the benefit of a minor child directly without the need for lengthy and costly court proceedings.

By designating the trust as your 401(k) beneficiary on behalf of your child(ren), the trustee appointed to manage your living trust can control the age at which your child(ren) receives the funds, as well as manage other aspects regarding the inheritance of your 401(k).

You should consult an attorney to ensure the trust meets legal requirements. Otherwise, your beneficiaries may face significant tax disadvantages or be disqualified altogether.

Non-individual Beneficiary

You can also designate a non-individual in the form of a charity or a “for-profit” entity as a beneficiary. The key difference is that the funds would have to be distributed all at once, rather than a little at a time over a beneficiary’s life span, since entities are not individuals and thus have no “life expectancy.” This could potentially result in adverse tax consequences for non-charitable, for-profit businesses. Charities, on the other hand, receive the benefits as 100% tax free income.

Contact your tax advisor for more information on adding a non-individual as a beneficiary of your 401(k) account. If you would like to designate a charity or a “for-profit” entity, contact us at support@guideline.com.

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