When you die, assets you hold in retirement accounts that have designated
beneficiaries
go directly to those beneficiaries — not through your estate and not through probate. The list includes your
401(k)
or other employer plan, your
individual retirement accounts
(IRAs), and any
annuities.
But if you don’t name beneficiaries or update your designations — for
example, after a divorce or a remarriage — the money may not go where
you intended.
Employer-sponsored retirement plans
The specific rules governing beneficiaries for your
employer-sponsored retirement plan
are included in the plan document, which you can request from your plan administrator.
If you’re married, your spouse must be the primary beneficiary of your
employer-sponsored plan unless he or she agrees in writing that you can
name someone else. Your spouse can roll over inherited plan assets into his or her own IRA and delay taking distributions until age 70 1/2. As of 2007, nonspouse beneficiaries of 401(k), 403(b), and 457 plans are also able to roll over the assets, although they have to use a special IRA — called an inherited IRA — to handle such transactions.
Unlike spouses, nonspouse beneficiaries are required to take annual withdrawals. The amount is based on life expectancy, so a 50-year-old beneficiary might be able to stretch out his or her withdrawals over 30 years or more. Meanwhile the assets that remain in the inherited IRA have the potential to grow.
In the past, nonspouse beneficiaries usually had to withdraw the money within five years and pay state and federal taxes on it.
