Four Key Rules Governing 401(k)s and IRAs

The rules governing the distribution of 401(k) and retirement account assets can be confusing. However, with 401(k)s and IRAs accounting for nearly 60% of the assets of American households with $100,000 or more to invest, it is worth the time to review and understand these rules. Four key rules governing these accounts are below:

1. The 401(k) holder’s spouse is the presumed beneficiary of the account, even if another individual is listed on the beneficiary form. The spouse can waive her right to the account and consent to the naming of someone else as the beneficiary. If an account holder remarries and wants the account assets to go to his or her children instead of the new spouse, he or she can roll the 401(k) to an IRA.
2. Single account holder’s 401(k) assets pass to the designated beneficiary, regardless of who is named in the will. Even if the designated beneficiary ends up being an ex-spouse, he or she will still receive the assets.
3. State law governs IRAs, and the account holder can generally name anyone as a beneficiary, regardless of spousal consent. Additionally, if the listed beneficiary is an ex-spouse, the designation will generally become null and void upon the death of the account holder. The assets will then generally pass under the IRA default plan (typically to the estate for single account holders).
4. When an account holder retires or changes jobs, spousal consent is not generally required to cash out a 401(k) or roll it to an IRA. Some employers may impose a rule requiring spousal consent, but it is not the norm.

See Carolyn T. Geer, Family Feuds: The Battles Over Retirement Accounts, The Wall Street Journal, Sep. 7, 2011.

Special thanks to Jim Hillhouse (WealthCounsel) for bringing this article to my attention.