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Designating Beneficiaries for Your Retirement Accounts

Most California residents have some form of retirement savings. These accounts usually do not pass as part of a person’s probate estate. Instead, the account holder is expected to name one or more beneficiaries who automatically receives any funds upon death.

Types of Retirement Accounts

There are several different kinds of retirement savings. The two most common are traditional individual retirement accounts (IRAs) and 401(k) plans. Both accounts offer tax benefits. Contributions to an IRA are tax-deductible while 401(k) contributions are made with “pre-tax” dollars. Tax is therefore deferred until the account holder makes withdrawals, which must begin by the age of 70 years and 6 months. The account holder must also pay a penalty if funds are withdrawn “early,” which is defined as before the person reaches the age of 59 years and 6 months.

Alternatively, a person may use a Roth IRA. Here the process is reversed from a traditional IRA in that contributions are taxed when they are made rather than when the account holder later makes withdrawals. There is also no mandatory age for making withdrawals, which are tax-free if the owner is at least 59 years and 6 months old at the time.

Spouses and Other Beneficiaries

As noted above, a retirement account holder usually designates a beneficiary to inherit any remaining funds upon death. This designation is legally binding, meaning it overrides any contrary provision in the account holder’s last will and testament. In this sense, retirement accounts are usually not considered a probate asset.

While the owner of a traditional or Roth IRA is typically free to name anyone they choose as a beneficiary, keep in mind that California is a community property state. One spouse therefore acquires a one-half interest in any retirement benefits accrued by the other during the marriage. Indeed, California law requires a spouse to give written consent before the other may designate a different beneficiary for a retirement account, and that consent may be revoked at any time prior to the account holder’s death. With respect to a 401(k) plan, federal law states that a surviving spouse is automatically entitled to inherit the entire account unless he or she has signed a waiver consenting to an alternate beneficiary designation.

If the account holder is divorced, that may also affect the designation of retirement account beneficiaries, depending on the terms of the marital property settlement.

Need Advice From a California Estate Planning Lawyer?

It is a good idea to periodically review the beneficiary designations on your retirement accounts, especially if you are unmarried (and not subject to a divorce decree). If one of your beneficiaries has died, make sure to name an alternate, otherwise your retirement account might pass under your probate estate. This can have significant tax consequences for your estate that are probably best avoided. An experienced San Diego estate planning attorney can advise you on how to deal with your retirement accounts. Contact the Law Office of Scott C. Soady to speak with an attorney today.

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