Naming beneficiaries on your 403(b) can have monumental long-term effects on your family. It’s important to get it right.
When you set up your 403(b), you fill out beneficiary information or beneficiary designations. This documents whom you wish to leave the assets to when you pass away. I often see mistakes made when filling out these designations. Some of these mistakes can have disastrous consequences if not caught early on. This article will serve as the ultimate guide to naming 403(b) beneficiaries. (Unsure of what a 403(b) is? Everything You Need to Know about Your 403(b) Plan)
Why Naming Beneficiaries is Important
As of March 31, 2017, there was $26.1 trillion dollars in retirement assets in the US. A large percentage of that is defined contribution plans and IRAs. These accounts require you to fill out beneficiary designations.
Why is this important? You worked damn hard to build wealth over your career. You should have control over what happens to your money when you die. Every family has a different dynamic. It’s imperative to give a long hard look at both who you want your assets to go to and how.
A common issue is the thought that it doesn’t matter who my beneficiaries are because I have a will. Let’s debunk this idea right now. Often, beneficiary designations take precedence over what is in your will. It’s important to have a will but your beneficiary designations and will should agree with each other.
If you don’t have a plan in place for passing on your assets, your state has one for you. How does that sound? Do you trust local government to decide what is in the best interest of your estate? Do you have faith that it will be handled cost-effectively?
Establishing Your Beneficiaries
Your primary beneficiary is first in line to receive benefits. For many, this is their spouse. You ARE NOT limited to naming one primary beneficiary. If you want to name your children as primary beneficiaries on an account, you can do so. They should be adult children, but more on that later. Young folks that aren’t married often name their parents or siblings as primary beneficiaries.
Your contingent beneficiaries are next in line. If your primary beneficiaries receive benefits when the primary cannot. If primaries predecease the owner, or are disqualified from receiving benefits, the contingent beneficiaries receive benefits. You can name many different contingent bene’s. I encourage every client to name primary and contingent beneficiaries. Too often, individuals only name a primary beneficiary. This creates a problem if the beneficiary predeceases them or passes at the same time.
You’ll want to qualify your beneficiaries as either per stirpes or per capita.
Per Stirpes means that if the named beneficiary predeceased the account owner, then his/her living children will inherit the assets in equal shares.
Per Capita means that if the named beneficiary predeceased the account owner, the other named beneficiaries would split his/her share.
Naming a Trust
This is important. A minor cannot directly inherit assets. In this case, it is important to work with an estate planning attorney to draft up a trust. This way, you can decide who manages the assets, in what amount, and how. Again, you don’t want the state to charge a hefty fee and make decisions for you.
It isn’t only for families with small children. If you have a child with special needs, you’ll want a trust that dictates how he/she will be cared for.
When Should I Review My Beneficiary Designations?
This is not a rotisserie chicken, don’t “set it and forget it.” Family dynamics change over time. Your feelings about those around you also change, so should your beneficiary designations. You should review your plans during every major life transition. These may include:
- Marriage– It’s shocking how many individuals don’t update when they get married. It is especially important if you get remarried.
- Divorce– Updating 403(b), IRA, Life Insurance and other account beneficiaries isn’t always top of mind when you’re going through a divorce. Take the time to make changes. I don’t know anyone who’d be thrilled to pass their wealth onto their ex…
- Having Children– This is a time when you should be updating your entire estate planning. This includes updating beneficiaries. Hopefully, you’ll set up a trust to name as beneficiary to take care of your minor children.
- Every 5 Years– Review every 5 years. It isn’t uncommon for someone to have a change of heart in their relationships that leads to a change in their wishes. It only takes a few minutes to look up your beneficiaries. Even if no changes are needed, you’ll feel better knowing that everything is up-to-date.
Conclusion: The Ultimate Guide to Naming 403(b) Beneficiaries
Beneficiary designations aren’t something we think about often. But, it’s important to get them right. Don’t forget to review these designations, especially during life transitions. Use this article to help you remove the guesswork out of naming beneficiaries.