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Retirement Account Caution: Change in Firm or Provider Requires Confirmation of Beneficiaries

Here is something to be aware of if you have IRA, 401(k), 403(b) or other retirement account.  At Samuel, Sayward & Baler  we are careful to advise you about how to designate the beneficiaries of your retirement accounts consistent with your estate plan.  In some cases, customized beneficiary designations are required to ensure these accounts are distributed properly to achieve your planning goals.

There are two circumstances in which these beneficiary designations can be disrupted and over which you have no control:

  • If your financial advisor changes firms. Although your accounts may move with your advisor to the new firm (if you so choose), your beneficiary designations may not necessarily move along with your retirement accounts.  If your financial advisor has changed firms, be sure to confirm with your advisor that beneficiaries have been correctly designated on your new retirement accounts established at the advisor’s new firm.
  • If your employer or former employer changes its 401k or 403b provider. Beneficiary designations on employees’ or former employees’ accounts typically do not move over to the new provider, and beneficiaries must be re-designated. This is another circumstance where action is needed to ensure that beneficiary designations are correct.

If the owner of a retirement account passes away with no beneficiary designated on that account, the account is payable to the account owner’s estate. Although the funds in the account may still be distributed consistent with the owner’s estate plan (assuming the account did not have a beneficiary designation different from the rest of the owner’s estate plan), there will be no opportunity for continued tax deferral or a so-called “stretch” payout of the retirement account over the life expectancy of the beneficiary.  The account instead must be distributed in a lump sum to the owner’s estate, or at best over a 5-year period, and the income tax payable on the account must be paid all at once.  This is a very bad result from a tax planning perspective.

If one of these situations occurs, do not delay in ensuring that your beneficiary designations are in place and are consistent with our recommendations and your estate plan.  In all cases, we recommend that you request written confirmation of beneficiary designations so that you can confirm that beneficiaries are designated correctly.  If you would like us to review your designations we are happy to do so.