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Retirement accounts require beneficiary designations, an integral part of estate planning. Social Security benefits have an automatic survivor benefit, but retirement plans, such as IRAs, require account holders to choose their beneficiaries. Some plans also need a spousal waiver and consent to make changes. Without named beneficiaries, retirement accounts go to an estate and are processed through probate.
Key Takeaways
- Individuals should name beneficiaries when applicable so that their assets are distributed as they want at their death.
- IRAs can be rolled over, inherited, converted to a Roth IRA, or disclaimed.
- Spouses often retain the right of ownership over 401(k)s, even if divorces are pending.
- Social Security survivor benefits may vary significantly depending on the beneficiaries and marital situation.
Individual Retirement Accounts (IRAs)
IRAs do not rely on an individual’s will when beneficiaries are designated. A beneficiary is the person or people who receive the Individual Retirement Account (IRA) when the account holder dies and has five options:
- Keep the IRA: A beneficiary can withdraw funds, even if younger than 59½, without paying a 10% early withdrawal penalty if the deceased has already started taking distributions. A surviving spouse, a minor child, or a disabled person is required to take RMDs based on the deceased person’s age rather than the beneficiary’s. If the heir is not a spouse, they must withdraw all the funds within 10 years of the original owner’s death. All withdrawals may be subject to income taxes. A Roth IRA requires beneficiaries to take RMDs upon inheritance.
- Roll Over the IRA: Beneficiaries can roll assets into a personal IRA without paying income tax or early withdrawal penalties unless they are under age 59½. A rollover into an inherited Roth IRA does not incur penalties if the assets have been in the account for five years. This option is only open to a surviving spouse who must transfer to the same account type—traditional IRA to a traditional IRA or Roth IRA to a Roth IRA. If the spouse rolls it into their personal IRA, they can update the beneficiaries and delay RMDs.
- Convert to a Roth IRA: For beneficiaries who anticipate being in a higher tax bracket later in life, it might be advantageous to convert a traditional IRA into a new Roth IRA account.
- Disclaim All or Part of the Assets: Designated beneficiaries can give up all claims to the funds, which go to the other beneficiaries named on the designation form.
- Cash Out the IRA: Beneficiaries can cash out the IRA and pay all applicable taxes.
401(k) Plans
Owners of a 401(k) can complete a form that designates beneficiaries, however, the law automatically requires a spouse to become the recipient. Even those who are legally separated are entitled to the account upon a spouse’s death. This changes only if a spouse signs a document giving up their rights as a beneficiary.
Divorce settlements generally include provisions for whether ex-spouses are entitled to any 401(k) money, in keeping with the rules of each spouse’s plan. Unmarried account holders should name a beneficiary to receive the account funds.
The beneficiary options for a 401(k) are the same as an IRA—keep it, roll it over, cash it out, or decline to receive it.
Social Security
Social Security will pay a one-time death benefit of $255 to a spouse in 2024. Without a spouse, a child or children can receive the benefit. Social Security can act as a pension during retirement and a life insurance policy for heirs. Spouses can receive full survivor benefits once they reach their full retirement age. Survivor benefits depend on an individual’s average lifetime earnings.
According to the Social Security Administration (SSA), children qualify for some benefits if a working parent dies. Unmarried offspring can receive benefits up to age 18 or 19 if they attend elementary or secondary school full-time. If a child is before age 22, they could receive benefits at any time. Stepchildren, grandchildren, step-grandchildren, or adopted children may also qualify under certain circumstances.
Divorced spouses can receive benefits if the marriage lasted at least 10 years, or caring for a child who is under the age of 16 or disabled. Widows and widowers have the option of collecting their survivor benefits first, then switching to their benefit at a later date if that is higher. When a surviving spouse retires, Social Security will always pay an individual’s benefits first. If their survival benefits are higher than their benefits, that person gets a combination of benefits, in a sum equal to that of those larger survival benefits.
How Do Estate Taxes Affect Beneficiaries?
For those who pass away in 2024, their beneficiaries are not subject to federal estate taxes if the total value of the estate is $13.61 million or less. In 2025, the threshold rises to $13.99 million. The surviving spouse can file a portability exemption to pull any unused portion of this amount into their estate to shelter it at their death. Individuals with assets that exceed the IRS amount can talk to an estate lawyer or tax attorney to discuss strategies for legally sheltering assets, like setting up a trust.
Can a Spouse Collect Their Own Social Security Benefits Plus Their Spouse’s?
No, Social Security does not add the two benefits together. Instead, should benefits continue, Social Security will most likely pay the higher of the two amounts.
How Long Do Social Security Survivor Benefits Last?
Social Security benefits for survivors last for life. This is true as long as the survivor collects a retirement benefit less than the survivor benefit. Should the survivor collect an amount greater, that greater amount will replace the survivor benefit.
The Bottom Line
Those with IRA, 401(k), investment, or cash accounts must have proper plans and beneficiary designations. Spouses who inherit a retirement account or qualify for survivor benefits from Social Security are subject to different rules than non-spousal beneficiaries.