Lynn Brenner's Family Finance

'Sweet Spot': The Key 11 Years of Retirement Planning

If you're nearing age 59 or you haven't yet reached age 70, listen up.

You're standing in a window of opportunity -- the 'sweet spot' of retirement planning. Now's the time to take steps to protect your future retirement income from the ravages of annual taxes and market volatility.  For more, see my recent Reuters article "Six Ways to Maximize Retirement 'Sweet Spot' Years".

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

 

Can My Husband Get My 401(k) Plan?

Q: My husband wants my 401(k) now, but I don't want to get distributions until I have to. Will he win if he goes through the court system? What is his right to my 401(k), which I opened before I married him? Right now, my daughter is my beneficiary. We have no pre-nuptial or post-nuptial agreement. --MT

 

A: Stop worrying. Your husband has no case to take through the court system. As long as you're alive, he has no legal claim to your 401(k) account. 

In fact, even if you want to take a 401(k) distribution yourself, you can't  do it while you're working for the company that sponsors the plan, unless you qualify for a special hardship withdrawal.

But your husband is legally entitled to be your 401(k) beneficiary unless he has waived that entitlement in a post-nuptial agreement. (Nobody can waive it in a pre-nuptial agreement because it's a right that doesn't exist until after you're married.) In fact, if you didn't give your 401(k) plan administrator a written waiver signed by your husband, the plan shouldn't have let you list your daughter as your beneficiary.

So what are your options if you want to make sure your husband doesn't inherit your 401(k) plan?

You have three choices:

1. You can persuade him to sign a waiver. 

2. As soon as you leave this job, you can transfer your 401(k) account into an Individual Retirement Account. (See my earlier posts on how to do a trustee-to-trustree transfer to avoid taxes.) IRAs aren't governed by the federal law that establishes the rules for 401(k)s. You can name your daughter or anyone else you choose as your IRA beneficiary. 

3. You can divorce your husband.  However, in a divorce he may get part of your 401(k) account even though you opened it before you married him. The reason: In most states, an account you have contributed to during your marriage is considered a marital asset. That makes it subject to division in a divorce. How big a share your husband might get depends on many variables, including how long you've been married and what other marital assets you own.  

Please send your questions to [email protected].  I'm sorry I can't respond personally to every email. Questions are only addressed online.

(c) Lynn Brenner, All Rights Reserved

Where to Keep Your IRA Beneficiary Forms

My May 12 post explained why IRA beneficiary designation forms are so important: They're the equivalent of a will for your IRAs.

I suggested that your safe deposit box is a good place to keep these forms. But I didn't make it clear that what you should keep are copies. The original forms must be filed with the IRA custodian -- i.e., the bank, brokerage, mutual fund company or other financial institution that holds the account.

Barry C. Picker, a Brooklyn NY tax accountant and IRA expert, points out that a hasty reading of my earlier post might lead some readers to the erroneous conclusion that it's okay to fill out a beneficiary form, sign it, and put it in your safe deposit box without ever submitting it to the custodian.

That could be disastrous!

"Say you filled out a form naming your son and sent it to the custodian. Now you change your mind and create a document naming your daughter, sign it, put it in your safe deposit box, but never submit it to the custodian. I don't think the daughter will get it," says Picker. "Definitely not without a fight from the son. I think what's on file with the custodian will trump it."

Just to make sure there are no misunderstandings about something so important, here's a step-by-step guide:

1. Ask your IRA custodian for a new beneficiary designation form and fill it out. (This is the easiest way to make sure you'll have a copy of the form, even if you aren't going to name a new beneficiary.)

Some custodians let you download or even complete this form online. Others simply ask you to send them written instructions, specifying the name of your beneficiary, his or her birth date and Social Security number, your relationship (e.g., spouse, son, daughter, friend), and the percentage of the account this person is to receive.

2. Make a copy of what you send the custodian, for your own records. You need this copy to prove that you submitted one, in case the custodian loses it.

3. Write a cover letter to go with the form. In your cover letter, you'll ask the custodian to send you written confirmation that he has received your beneficiary designation form.

4. Make a copy of the cover letter for your own records.

5. Send the original beneficiary designation form, along with the cover letter, to the IRA custodian.

6. Stay on top of the situation by making sure you receive that written acknowledgement.

6. Put your copy of the form, your copy of the cover letter, and the custodian's letter of acknowledgement in a safe place. It doesn't have to be a safe deposit box. But wherever it is, you should make sure that your executor and/or your lawyer knows where to find it.

You can change your IRA beneficiary designation as many times as you wish. Just make sure you always date it, and always have a copy of the current form.

Please send your questions to [email protected]. I'm sorry I can't respond personally to every email. Questions are addressed only online.

(c) Lynn Brenner, All Rights Reserved.

When IRA Beneficiary Forms Are Missing, Who Inherits?

Q: You’ve written about the importance of IRA beneficiary designation forms, and about how banks and brokers sometimes lose them. What happens if my children can't find my IRA beneficiary forms after I’m dead? Does it mean that they won’t inherit the account? –LR via email

 

A: Not necessarily. They may still get your IRA, depending on how your will is worded. But they'll have to empty the account and pay taxes on it much faster than they would if they’d inherited it as the designated beneficiaries.  

Let’s start with the ideal: Imagine you leave a $400,000 IRA to your 40-year-old daughter, naming her on the beneficiary designation form, which you keep in your safe deposit box, attached to your will with a paperclip.

As the designated beneficiary, your daughter can stretch her annual withdrawals from the account over her 43.6 year life expectancy. (Her first required minimum withdrawal would be $9,174 -- $400,000 divided by her 43.6. life expectancy) Her withdrawals are added to her taxable income every year,  but the IRA balance keeps growing untaxed. If she takes only the minimum required distributions every year and earns a decent investment return, the IRA could be worth more than $1 million by the time she's 65.

The less happy version: Your IRA beneficiary form is missing. Your estate is the default beneficiary. If your will says that your daughter inherits your estate, she still gets the IRA – but not on such favorable tax terms because your estate is the designated beneficiary, and it has no life expectancy over which to stretch distributions.

How quickly the IRA must be emptied in this case depends on your age when you died.

 If you were younger than 70 and a half, the law says the IRA must be emptied within five years of your death. If you were older than 70 and a half , it must be emptied over what the IRS actuarial table says was your remaining life expectancy. (If you died at age 75, that would be 13.4 years, for example.)

Either way, your daughter gets the IRA but loses decades of untaxed investment growth.

Finally, of course, there’s the worst turn of events: You assumed your daughter would get the IRA, so your will leaves the rest of your estate to someone else – say, to your trophy second wife. Even if your daughter is named in the will, she'll have to share the IRA with her stepmother. They'll also share it if there is no will. (When you die without a will, your estate is divided between your surviving spouse and children.)

And if there's a will, but it doesn't name your daughter, the missing IRA beneficiary form could result in disinheriting her. 

Please send your questions to [email protected]. I'm sorry I can't respond personally to every email. Questions are addressed only online.

(c) Lynn Brenner, All Rights Reserved.