Retirement

What happens to retirement benefits when you die? Understanding how retirement accounts work and how retirement wishes are handled after death can help ensure your family benefits from the gains you’ve made over the course of your working years.

My Life & Wishes - Retirement Accounts After Death

What is a Retirement Account?

A retirement account is an important part of your financial future. The term retirement account refers to a savings and investment account that provides income during retirement. Many companies offer retirement accounts as part of their employee benefits package.

The tax benefits of retirement accounts vary, but they do share some common traits.

  • They impose limits on how much can be contributed to the account.
  • Participants must meet eligibility requirements.
  • There are penalties for withdrawing money before a certain age.

Types of Retirement Accounts

An Individual Retirement Account (IRA) lets you contribute a certain amount each year and invest your contributions tax deferred. You pay income taxes on the money when it’s withdrawn. If the money is withdrawn before age 59½, you will pay a penalty in addition to taxes.

With a Roth IRA, contributions are made after tax, but any money generated within the account is not taxed again. Your contributions or basis can be withdrawn from a Roth IRA before retirement age without penalties.

A 401(k) plan is a workplace retirement account. This account allows you to contribute a portion of your pre-tax paycheck in a tax-deferred investment account. Other workplace retirement accounts include 403(b) and 457(b) plans.

A Roth 401(k) combines features of the Roth IRA and a 401(k). This is also a workplace account, but the contributions come from your after-tax paycheck instead of your pre-tax paycheck.

A SIMPLE IRA is a retirement account that small companies can offer to employees. Similar to a 401(k), contributions to a SIMPLE IRA are made on a pre-tax basis.

A SEP IRA is for self-employed individuals that have no one working for them. With a SEP IRA, a portion of your income can be made to the account and then deducted from your income taxes.

What Happens to Retirement Accounts When the Account Holder Dies?

Money remaining in your account(s) will pass directly to your named beneficiary. For some accounts, such as a 401(k), the law in some states may require you to name your spouse unless he or she provides you with written permission to name someone else. With other retirement accounts, such as an IRA, you may name any beneficiary you choose.

Don’t use your will to name beneficiaries. Your assets will be distributed to the named beneficiaries in the specific retirement account, regardless if the will stipulates anything contrary about the account.

If there are no named beneficiaries on the account or if there is a complication with the named beneficiary, the account will be subject to probate. The probate process varies by state, but chances are a stranger will determine who gets what.

Taking the proper steps in designating a beneficiary is an important first step; however, your beneficiary will need to file a claim to receive the benefits. This means your beneficiary must be aware that this account exists and is meant for them.

What Retirement Wishes to Record

There are good reasons to make a record of your retirement wishes. This simple task will make things easier for your loved ones. Should you become incapacitated, the person in charge of your finances will need to manage your accounts for you.

At a minimum, make a list of every account you have. For each account, record the following:

  • The name of the financial institution
  • The account or identification number
  • Contact information for the account manager or advisor
  • Beneficiary of the account
  • If you are currently receiving benefits, record how much and the location of your account statements

Don’t forget to document any Social Security benefits, including benefits based on your earnings (or disability) that go to your family members and those you expect in the future.

Review your accounts and beneficiary information regularly. Update your records every time a change occurs that affects your retirement wishes.

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