Types of 401k plans

If you have a Roth IRA, you might want to opt for the traditional 401(k) at work. Likewise, a Roth 401(k) might be a good choice for you if you already have a traditional IRA. If your employer offers both types of 401(k)s, you can divide your savings among them.

The Employee Retirement Income Security Act (ERISA) covers two types of retirement plans: defined benefit plans and defined contribution plans. A defined benefit plan promises a specified monthly benefit at retirement.

The Spouse Is the Automatic Beneficiary for Married People

A federal law, the Employee Retirement Income Security Act (ERISA), governs most pensions and retirement accounts.

Many married couples own most of their assets jointly with the right of survivorship. When one spouse dies, the surviving spouse automatically receives complete ownership of the property. This distribution cannot be changed by Will.

Whom should I not name as beneficiary? Minors, disabled people and, in certain cases, your estate or spouse. Avoid leaving assets to minors outright. If you do, a court will appoint someone to look after the funds, a cumbersome and often expensive process.

If you are married, federal law says your spouse* is automatically the beneficiary of your 401k or other pension plan, period. Even if your intended beneficiary is a domestic partner you’ve been with for 20 years, your spouse will have legal claim to your 401k if you die, unless he or she signs a waiver.

When a person dies, his or her 401k becomes part of his or her taxable estate. However, a beneficiary generally won’t have to wait until probate is completed to receive the account balance.

Widows and widowers can roll over inherited IRA funds into their own IRAs. If required minimum distributions must be taken from the inherited IRA, widows and widowers can calculate them based on their own life expectancies. Spousal beneficiaries can also empty an inherited IRA on a five-year schedule.

Transfer-on-Death Assets on a 401(k) Account

To contest a primary beneficiary, a contingent beneficiary of a 401(k) account must be able to prove to the probate judge that the beneficiary declaration is defective. Normally, only a beneficiary (primary or contingent) can contest the disposition of a 401(k) account.

Beneficiary Designation Trumps Will

If the owner of a 401k is single when he or she dies, the assets go to the designated beneficiary, no matter what his or her will states. In addition, the assets will be distributed to the designated beneficiary regardless of any other agreements — even court orders.

Wills do not override beneficiary designations; rather, beneficiary designations ordinarily take precedence over wills.

No Designated Beneficiaries

If an account holder did not designate a beneficiary, typically the account would become part of the estate to be dispersed through probate court. If the account holder died before age 70 ½, the resulting beneficiary would be required to use the 5-Year Rule.

Inherited 401(k) distribution options

Take a lump-sum distribution. Withdraw all funds by the end of five years after the owner’s death (only if the account owner died before 2020). Withdraw all funds by the end of 10 years after the owner’s death (only if the account owner died in 2020 or later).

After inheriting a 401(k) from a parent, your primary decision is when to take the money. As a non-spouse beneficiary, funds from an inherited 401(k) plan must be distributed by the end of the 10^th year following the year of death¹. This is called the 10-year rule.

While 401(k) plans are a valuable part of retirement planning for most U.S. workers, they’re not perfect. The value of 401(k) plans is based on the concept of dollar-cost averaging, but that’s not always a reliable theory. Many 401(k) plans are expensive because of high administrative and record-keeping costs.

There’s more than a few reasons that I think 401(k)s are a bad idea, including that you give up control of your money, have extremely limited investment options, can’t access your funds until you’re 59.5 or older, are not paid income distributions on your investments, and don’t benefit from them during the most