A will is only one part of planning for a 401(k) or IRA. Each account has rules for who gets the funds at death. Federal law, Texas property rights and tax rules can affect the result.
Review each account on its own. A choice that works for an IRA may not work for an employer’s 401(k).
1. Relying on the will alone
Get the beneficiary form. Ask the plan or IRA provider for its copy. This form names who should receive the funds when you die. Check the names. Include the people or groups you intend, with backups. Keep a copy. Ask the provider to confirm it was accepted.
A will does not usually replace this process. If no valid form applies, the plan or account may have default rules for who gets paid. See the IRS guide to death benefits.
Review the forms after a marriage, divorce, birth or death. Do not rely only on an old copy in your files.
2. Treating a 401(k) and IRA as the same
Many employer plans protect a spouse’s rights under federal law. In most 401(k) plans, naming someone else requires the spouse’s written consent. A notary or plan representative must witness it. Ask the plan which rules and forms apply. The U.S. Department of Labor explains the rules.
An IRA does not use that same employer-plan consent process. Texas community-property rights may still need legal review. Do not assume every married person’s account must be split 50/50 at death. Do not assume the form settles every claim to ownership either.
Bring the account type, records of money paid in, marriage dates and any marital agreement to your lawyer.
3. Assuming a divorce decree fixes every account
A divorce can affect both ownership and who gets paid at death. To divide a qualified employer plan, a qualified domestic relations order, or QDRO, may be needed. The plan must decide if the order meets its legal rules. See the Department of Labor’s QDRO guide.
An IRA transfer as part of a divorce uses different rules. Ask the IRA provider and your lawyer how to carry out the decree. An employer-plan form does not replace that review.
Check the court order and the current form that names who inherits. State divorce rules do not always override federal plan rules.
4. Naming an adult when the funds are meant for a child
If you name a guardian or relative to receive the funds outright, the funds may belong to that adult. That choice does not, by itself, require the adult to hold them for your child.
Ask about a trust or a lawful custodial plan that the account provider can accept. A trust must be written with the account and tax rules in mind. It is not always the best tax choice.
If the person who will inherit gets means-tested benefits, discuss those rules too. Review the account form and estate plan together before you change who is named.
5. Assuming all heirs follow one payout rule
Start with the date of death. Then check who inherits. It also matters whether the owner had reached the point when required withdrawals must start. The plan’s terms matter too.
Many who inherit face a 10-year payout rule. Some must take funds out each year as well. Others have different options, such as a spouse or another eligible designated beneficiary. One exception covers the account owner’s minor child. It is not for every child named to inherit.
Funds taken from a traditional account are generally taxed to the extent they were not taxed before. Roth rules can differ. Inheriting an account does not make all the funds tax-free. Check IRS Publication 590-B. Have a tax adviser confirm what applies to the death and account involved.
6. Confusing a gift at death with a QCD
Naming a charity to receive an account is a plan for a gift at death. A qualified charitable distribution, or QCD, is a different tool used during life.
A QCD generally goes straight from an IRA to an eligible charity. The IRA owner must be at least age 70½. A direct payout from a 401(k) is not a QCD. Other limits apply, including rules for ongoing SEP and SIMPLE IRAs. Read the IRS IRA FAQs before arranging one.
To review your plan, gather recent statements, beneficiary forms and marriage or divorce records. Our estate planning team can check how the legal documents work together. Ask a tax adviser to check the payout dates and taxes. Do this before funds move.