When choosing a beneficiary for a retirement plan, it’s important to understand how your spouse will be treated under the plan. Surviving spouses are treated differently under 401(k)s and IRAs. In general, 401(k) plans provide protections for surviving spouses that IRAs don’t. 401(k) plans are governed by a federal law known as ERISA. Under this law, a surviving spouse is the automatic beneficiary of a retirement plan. If an employee wants to name someone other than a spouse as a beneficiary, the spouse must consent to this in writing. (There are some exceptions; for example, the spouse may have to be married to the employee for a certain amount of time). IRAs are not governed by ERISA, however, so they don’t include the same protections for spouses. Importantly, this is true even if a 401(k) is rolled into an IRA.
In a recent legal case, a husband rolled his 401(k) into an IRA after he retired. He named his children as the IRA’s beneficiaries. After he died, his wife claimed that she was entitled to the account funds as his surviving spouse. She argued that because her husband had rolled his 401(k) into the IRA, she should receive the same protections that the 401(k) had given her. But a federal appeals court in California disagreed, deciding that IRAs aren’t governed by the ERISA rules even if the funds originated in a 401(k).
If you have an IRA and you want your spouse to be its beneficiary, you have to specifically name the spouse as the beneficiary. If you have a 401(k) and want your spouse to be the beneficiary, it’s still a good idea to fill out a beneficiary designation form naming your spouse. And if you roll it over into an IRA, make sure you fill out a new beneficiary designation form. If you want someone other than your spouse to be the 401(k)’s beneficiary, you’ll need your spouse’s consent in writing.
In any case, whether you have a 401(k) or an IRA, it is important to regularly check your beneficiary designations to make sure they are current. And keep in mind that if your spouse won’t need all the assets in an IRA to live on, there may be ways to save taxes by naming someone else as a beneficiary or partial beneficiary.