When was the last time you checked the beneficiary designations on your retirement plan or life insurance policy? It's an important - but often overlooked or forgotten - aspect of wealth transfer.
When was the last time you checked your beneficiary designations for your individual retirement account (IRA), employer retirement plan, annuity or life insurance policy? If you haven’t examined it since the account was set up, you are not alone.
Due to changing circumstances and shifting priorities, you may find that your named beneficiaries are no longer in keeping with your estate plan or wishes. If you have switched jobs, become a new parent, divorced or survived a spouse or a child, your current beneficiary designations may need to be updated.
Consider the “What If?”
In the heat and emotion of divorce proceedings, for example, the task of revising one’s beneficiary designations can fall through the cracks. A court decree that ends a marriage also terminates the provisions of a will, but it does not automatically revise the beneficiary status of an employer-sponsored retirement account or an IRA. Some financial institutions, automatically cancel the designation of a spouse as the beneficiary of an IRA in the case of divorce, but not all do. So, for example, if an IRA owner remarries and has a new family, but fails to change the beneficiaries on the account, the original beneficiary may have a legal claim to the assets in the event of death.
Also keep in mind that the law requires that a spouse be the primary beneficiary of a 401(k) or a profit sharing account, unless he or she waives that right in writing. A waiver may make sense in a second marriage if a new spouse is already financially set, and the children from the first marriage may need the money.
Steps to Stay Current
To ensure that your beneficiary designations are current and up-to-date, consider the following steps:
Make a list of all accounts that have named beneficiaries. This may include 401(k) plans, 403(b) plans, 457 plans, IRAs, pension plans, life insurance policies, annuities and bank accounts.
Contact the plan administrator or financial institution that maintains or services your account to verify your current beneficiary designations. You may want to do this with the help of your tax advisor or estate planning professional to ensure that these documents are in synch with other aspects of your estate plan.
Keep it safe. Store this list in a safe place with your other estate plan documents, such as your will, health care proxy and power of attorney, and make sure your designated executor has a copy.
Register for online access. If you do not already have online access to your accounts with beneficiary designations, consider registering so you can view and update your account information whenever you need to.
Consolidate. If you have changed jobs and left your assets in your former employers' plans, you may want to consider moving these assets into a rollover IRA. Consolidating multiple retirement plans into a single tax-advantaged account can make it easier to track your investment performance and streamline your records, including beneficiary designations.
Naming beneficiaries and keeping them up-to-date is only one important aspect of estate planning. Financial Advisors can help you make sure your entire estate plan addresses your current wishes and circumstances.
Anita Srivastava is a Financial Advisor with the Global Wealth Management Division of Morgan Stanley in Ridgewood, NJ. The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.
Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Morgan Stanley. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.
Typically, as a retirement plan participant who may be receiving an eligible rollover distribution from the plan, you have the following four options (and you may be able to engage in a combination of these options depending on your employment status, age and the availability of the particular option):
1. Cash out the account value and take a lump sum distribution from the current plan subject to mandatory 20% withholding, as well as potential taxes and a 10% penalty tax,
OR continue tax deferred growth potential by doing one of the following:
2. Leave the assets in your former employer’s plan (if permitted),
3. Roll over the retirement savings into your new employer’s qualified plan, if one is available and rollovers are permitted, or
4. Roll over the retirement savings into an IRA.
Each option offers advantages and disadvantages, depending on your particular facts and circumstances (including your financial needs and your particular goals and objectives). Some of the factors you should consider when making a rollover decision include (among other things) the differences in: (1) investment options, (2) fees and expenses, (3) services, (4) penalty-free withdrawals, (5) creditor protection in bankruptcy and from legal judgments, (6) Required Minimum Distributions or “RMDs”, and (7) the tax treatment of employer stock if you hold such in your current plan.
The decision of which option to select is a complicated one and must take into consideration your total financial picture. To reach an informed decision, you should discuss the matter with your own independent legal and tax advisor and carefully consider and compare the differences in your options.
If you’d like to learn more, Please contact Anita Srivastava.
The author(s) and/or publication are neither employees of nor affiliated with Morgan Stanley Smith Barney LLC ("Morgan Stanley"). By providing this third party publication, we are not implying an affiliation, sponsorship, endorsement, approval, investigation, verification or monitoring by Morgan Stanley of any information contained in the publication.
The opinions expressed by the authors are solely their own and do not necessarily reflect those of Morgan Stanley. The information and data in the article or publication has been obtained from sources outside of Morgan Stanley and Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of information or data from sources outside of Morgan Stanley. Neither the information provided nor any opinion expressed constitutes a solicitation by Morgan Stanley with respect to the purchase or sale of any security, investment, strategy or product that may be mentioned.
Article by Contently Inc. and provided courtesy of Morgan Stanley Financial Advisor.
Anita Srivastava may only transact business, follow-up with individualized responses, or render personalized investment advice for compensation, in states where [he/she] is registered or excluded or exempted from registration, [insert URL like to FA website or FINRA Broker Check http://brokercheck.finra.org/Search/Search.aspx].
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