There are enough issues to deal with after you die without being left a giant tax mess or a legal battle over your estate. But this often happens to widows and widowers whose spouses have died before cashing in their pensions. In particular, dealing with a 401k settlement could be stressful and complicated for your spouse or would be beneficiaries upon your death if clear directives were not put in place.
If your spouse or beneficiaries find themselves in this situation then they will be forced to seek competent legal counsel to remedy this complex situation. Obviously, this will require a substantial cost in attorney fees and will cut into the money they will end up receiving from your 401k account after your death.
Estate Planning and 401k
Retirement seems a long way away, but you might not live to see your 65th birthday. What happens if you die before it is time to start receiving payments from your 401k plan? You have to plan ahead, no matter how morbid this topic might seem. If you do not plan ahead and have a concise estate planning strategy, the money from your 401k could end up in the wrong hands.
Usually, it will pass to your spouse by default, but to ensure this is the case, name him or her in the forms you signed when starting the 401k plan at your company. You can actually name more than one person and stipulate how much each of these people will receive as a percentage.
Advisers suggest naming a first choice and second choice beneficiary in case your first choice dies before you change your documentation and you die in the meantime, or both of you die together (in a car crash, for example).
Then proceed to make sure you back up your wishes by clearly stating these same directives in your will. You should have a will prepared anyway as a part of your future financial strategy. This goes a long way to protect your heirs. So having this detailed in your will should provide the state yet another level of proof on how you wish to have your 401k disbursed upon your untimely demise without making some very common mistakes.
Reviewing Your 401k Documentation
The 401k paperwork you initially filled out and signed and returned to the 401k program administrator might seem like a job you do once and then forget about. But you really should pull out the paperwork you recorded and look it over periodically as you would with your will and be careful when you think about making some early withdrawal! In particular, be sure to alter information, such as your beneficiary, if you get divorced or are widowed. Change the division of money if you have another child. Alter arrangements simply because you wish to leave your money with someone who would not receive the money by default.
Keeping your 401k documentation up to date is the first step to making sure there is a smooth transition of these funds in your estate upon your death. This also guarantees that the Government or State will not get their hands on your hard earned investment plan and instead your family will get the full benefit. Learn also more about a traditional IRA vs. a rollover IRA.
What If There Is No Beneficiary?
If you forget to create a beneficiary, all of your money becomes part of your estate. This includes the proceeds from selling your home, business, cars, assets, etc. In order for your beneficiaries to get the benefit of your 401k plan, they will be forced to go to court. These cases are notorious for taking a long time and costing quite a bit of money to resolve.
Consider how much money and aggravation you will avoid by simply making sure your 401k is clearly spelled out and your will also clearly states your wishes. The last thing you want is for your 401k earnings to be passed unto the Government or the State treasury. I’m pretty sure even if you have no beneficiaries you can think of a few worthy charities that would be far better off with your money than the State. See also: “How to build a real estate imperium with your 401k plan.”