The Forgotten 401(k) Beneficiary
Connor Cox, CFP®
Quick Take
As you move through various jobs and promotions, it’s easy to forget to update your retirement account beneficiaries. Neglecting this simple task can result in significant financial consequences. Make it a priority to review your beneficiary designations regularly.
It’s important to remember that the beneficiaries listed on your retirement accounts will take precedence over what is stated in your will or trust. Ensure your beneficiary designations align with your current estate planning wishes to avoid unintended outcomes.
Listing your estate as the beneficiary will subject your assets to probate and likely compress the allowed distribution timeline.
As we navigate our working years, juggling various job opportunities and advancements, it's all too easy to lose track of the finer details, such as keeping the beneficiaries of our retirement accounts up to date. According to a recent Bureau of Labor Statistics report, the average American adult will hold more than 12 jobs by the time they retire. Retirement plans are often the afterthought following a job change or promotion. Moving retirement plans can be a cumbersome process, which is why many workers amass a small collection of 401(k) accounts over their working years. While there is nothing inherently wrong with keeping these accounts separate, the beneficiary designations are often frozen in time and reflective of our circumstances of yesterday.
A recent article from the Wall Street Journal stressed how important it is to regularly update who you want your retirement account money to go to when you die. The article's subject, Jeffery Rollison, began his employment with Proctor & Gamble in 1986. When he initially enrolled in the company's 401(k) plan, he selected his then-girlfriend as the sole beneficiary of his 401(k). His decision made sense at the time because he was single and did not have children. While picking her wasn't a problem, Rollison overlooked updating his beneficiary designation after their relationship ended in 1989.
From the year of their break-up until his untimely death in 2015, the S&P 500 grew by a staggering 1,132.95%. While we don't have the exact details of Rollison's retirement investments, we do know that they grew to approximately $750,000. This substantial sum, which could have significantly benefited his family, was routed to his ex-girlfriend instead.
This situation is a stark warning about the significant financial loss that can result from neglecting to update your beneficiary information. In addition to ensuring your named beneficiaries are in alignment with your current estate planning wishes, consider the following questions during your review:
Are your named beneficiaries different from what your will or trust dictates should happen? Remember that beneficiary designation forms will supersede what is prescribed in your trust or will.
Does your estate plan include charitable bequests? If so, consider utilizing assets that do not receive a step-up in basis or are taxable at ordinary income tax rates.
Is your "estate" listed as the beneficiary? If so, remember that assets left to your estate are subject to probate and likely a compressed distribution schedule. Designating your estate as the beneficiary might condense ten years' income into just five.
Don't be like Jeffrey! Take stock of your retirement accounts to ensure they are up to date with your current estate planning wishes.
Contact us at 865-584-1850 or info@proffittgoodson.com
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