Who Should You Name as Beneficiary of Your IRA or 401(k)?

Your will and trust don't control your retirement accounts. The beneficiary form does. And who you put on that form decides two things: how long your family has to take the money out, and how much income tax they pay on it.

Why the timeline matters

Money in a traditional IRA or 401(k) grows tax-deferred. Every withdrawal is taxed as income to whoever inherits it. The longer they can spread the withdrawals out, the longer the money keeps growing, and the less likely a big lump sum pushes them into a higher tax bracket.

How long each type of beneficiary usually gets

• A charity or other nonhuman beneficiary: usually 5 years.

• Most people, like adult children: 10 years.

• A surviving spouse, a disabled or chronically ill beneficiary, or someone not more than 10 years younger than you: generally their life expectancy.

• Your minor children: life expectancy until age 21, then the 10-year clock starts.

The exact rules can change depending on things like when the account owner dies, so treat these as the usual starting point.

If you're married

For a 401(k) and other plans covered by federal ERISA rules, your spouse is generally the beneficiary unless they sign a written waiver. IRAs don't have that federal rule. But in California, your spouse may still have a community property interest in an IRA built up during the marriage. Naming someone else is worth a conversation first.

What I usually recommend

For most clients, I recommend naming the people you love directly as primary beneficiaries. That's simple, and it usually gives them the most time. Your trust then goes on as the backup. If a beneficiary dies before you, the account goes to your trust and follows your instructions, instead of landing in your estate and possibly in probate.

What about a Roth conversion?

It can help. Your beneficiaries generally won't owe income tax on what they take out of an inherited Roth. The tradeoff is that you pay the tax now, on what you convert. Bring your financial advisor or CPA into that decision.

Check your forms after big life events

Marriage, divorce, a birth, or a death in the family are all good reasons to pull out your beneficiary forms and make sure they still say what you want.

If you'd like to make sure your retirement accounts fit your estate plan, book a complimentary Peace of Mind Planning Session.