Life brings many changes throughout, and one of the biggest ones is retirement. It’s essential to carefully review and select the people in your life who you’d like to receive your retirement benefits — your beneficiaries — prior to retiring, as making changes to your beneficiaries after you’ve retired is extremely difficult, if even possible at all.
This article will focus on the designation of beneficiaries for your pension or retirement plan, the importance of selecting beneficiaries carefully for your plan, and how to go about making changes to your beneficiaries after you retire.
What Is A Beneficiary?
Simply put, a beneficiary is a person or entity that you legally designate to receive the benefits from your retirement plan. Naming someone as your beneficiary on your retirement plan means that that person will receive a portion of your retirement assets after you pass away.
What Are The Three Types of Beneficiaries?
- Primary: Your primary beneficiary is the person, people, or organization(s) you name to receive your assets upon your death.
- Contingent: Your contingent beneficiary is the person, people, or organization(s) you designate to receive your assets if your primary beneficiaries cannot be found or pass away before you do.
- Alternate: An alternate beneficiary is one who can receive assets not specifically left to the primary or contingent beneficiary, or if the primary or contingent beneficiaries are unable to collect the assets left to them.
Most retirement accounts require that you designate beneficiaries for your retirement assets to ensure that your assets are distributed as you would like them to be, should you pass away.
How To Designate Your Beneficiary
Beneficiaries must meet certain eligibility criteria in order to receive benefits. The Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed in 2019 and amended in 2022 to help more Americans save for retirement, and it gives specific criteria that must be met.
Specifically, there are five categories of individuals considered to be eligible:
- The surviving spouse of the account owner
- Their child younger than 18 years of age
- A disabled individual
- A chronically ill individual
- A person not more than 10 years younger than the deceased account owner
- Some plans will allow any person to be named, but the cost will be determined by their age.
In order to name these beneficiaries, certain forms must be completed by the account owner. These forms are either prepared paperwork or digital forms from the company contracted by your employer for your retirement benefits. (Your employer will not usually administer those benefits directly.) You will generally be required to submit these forms when applying for retirement benefits.
In some cases, employer-sponsored benefit plans require extra considerations in the naming of a beneficiary, so it is crucial to review all of the plan information you receive thoroughly and carefully before naming any beneficiaries. One essential consideration should also be whether or not your beneficiary or beneficiaries will be able to shoulder the tax burdens of your asset distribution. As many employer-sponsored plans are taxed at the age of retirement, your beneficiary may not receive as much of your benefits, based on their tax limitations, as you would like.
Modifying Beneficiaries After Retirement
Some retirement programs allow you to change your beneficiary after you retire; many, however, do not.
Public employees of the state of Nevada whose benefits are administered through the PERS system, for example, are not allowed to change beneficiaries after they retire with the exception of a change to no beneficiary. This would require a subsequent court order or a stipulation from the beneficiary. Certain elements of your plan can be changed with the agreement of your spouse, but these are not updated retroactively, so the changes will not be applied to your benefits.
Some retirement plans and programs do allow you to make changes after retirement. These options generally require that you complete new forms, make updates online, and/or contact your plan administrator.
Can Changing My Beneficiary Have a Negative Impact?
Changing your beneficiary designations may also cause you to incur other challenges. These may come to light in the form of additional taxes, legal challenges to your changes, and difficulties in estate planning.
If you do make changes to your beneficiary designations, whether before or after retirement, it is vital to notify any of the beneficiaries being changed (if they already know that they are named beneficiaries). Communication with your beneficiaries is essential so that they know what to expect.
Factors to Consider
It’s also important to consider how changes to your beneficiaries may impact other legal assets such as any established estates or trusts. Aligning your retirement plan with your estate and any other assets you may have distributed to beneficiaries ensures that your beneficiaries retain solid legal standing. Updates to your retirement plan should also be reflected in estate and trust planning.
As these legal matters can become considerably complex rather quickly, seeking professional guidance via estate attorneys or other financial advisors is highly recommended. These professionals can ensure that your distributions are made as you would like them to be, find any legal loopholes or problems that may arise, and help you rest assured that your assets will be available to whomever you designate.
Regularly reviewing your designated beneficiaries is also highly recommended. This is important to ensure your financial goals are aligned properly and your assets will be distributed in accordance with your wishes.
Let QDRO Masters Guide You Towards Retirement
Retirement planning can seem troublesome and difficult. Designating beneficiaries can seem confusing and complicated. Fortunately, there is help available.
Retaining control of your assets upon retirement and designating appropriate beneficiaries is ultimately your responsibility, but you don’t have to go it alone. Ensure your wishes are met and your desires for your assets are protected by seeking legal expertise from the pros at QDRO Masters.
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