In the event you pass away, your beneficiary is entitled to inherit your retirement savings in a 401(k). A beneficiary is the person(s) or entity who would receive your 401(k) benefit.
When setting up your Guideline 401(k), you will be asked to designate a beneficiary within the Account Settings page. Although a beneficiary designation isn’t mandatory, you should take the time to designate your beneficiaries if you are particular about who will inherit your hard-earned money and want to spare them the hassle.
Primary vs Secondary (contingent) Beneficiaries
Primary Beneficiaries are first in line to inherit your retirement savings.
Secondary beneficiaries will inherit your retirement savings when all primary beneficiaries are unable to claim the funds. 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.
You may designate up to 10 primary beneficiaries and 10 secondary beneficiaries. If a primary beneficiary is unable to inherit the funds, their portion will be evenly distributed to the other primary beneficiaries before the secondary beneficiary can claim the funds.
Types of Beneficiaries
Taking the time to choose your beneficiaries now can help your family avoid probate later. Please tell your family or friends if you’ve selected them as a beneficiary, because your beneficiaries must first contact our Participant Support team when ready to claim.
The types of beneficiaries include:
- Trust or,
- 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.
- 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. Check out this article to understand the importance of marital status.
If you don’t name a beneficiary, or if none of your beneficiaries survive you, your account will be distributed in the following order:
- Surviving Spouse,
- Children (split equally),
- Parents (split equally) or,
- Your estate
Minors as a Beneficiary
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 legal 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 as a Beneficiary
You might also want to create a living trust and name the trust as your beneficiary.
Benefits of creating a Trust include:
- Protecting your privacy since going through the probate process is public record,
- Controlling your wealth and determining when and to whom the assets are distributed and,
- Protecting your heirs from others who want to claim your funds.
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. Additionally, 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 managing other aspects regarding the inheritance of your 401(k).
You should consult an estate attorney to ensure the trust meets legal requirements. Otherwise, your beneficiaries may face significant tax disadvantages or be disqualified altogether.
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.
Benefits for donating your retirement funds to a charity upon death:
- Your heirs and estate will not pay income tax and will receive an estate tax deduction,
- The full distribution amount will go directly to the charity and,
- You’re supporting a good cause.
Please ensure the charity’s tax ID is included when designating a charity within the Account Settings page and Guideline will contact the charity directly to send the funds to them.
Estate is the named Beneficiary
In the event that all the beneficiaries are unable to inherit your retirement savings, your estate is the named beneficiary. The executor, the individual appointed to administer your estate, will either need to have a notarized Small Estate Affidavit completed after contacting Guideline or go through probate to retrieve an IRS letter for the probated estate.
Participants are encouraged to consult with an estate attorney and financial advisor prior to designating a beneficiary in the Account Settings page.