Making a contingency plan in the event of unforeseen circumstances is a good business practice. The same is true when planning for retirement.
All retirement accounts require the owner to name a beneficiary – the person who will assume the assets of the account upon the death of the owner. But what happens if the beneficiary should pass away before the owner dies? Without a contingent beneficiary, the funds in the account would go to the owner’s estate.
Consider a situation where the primary beneficiary is not the account holder’s wife, but instead is his son. If the son passes away before his father, the proceeds from the account would revert to the elder man’s estate and not to his surviving spouse.
If the surviving spouse is the sole beneficiary of the estate, the retirement funds will eventually pass to her – but not without first resulting in otherwise avoidable taxes.
In this scenario, the proceeds that roll into the surviving spouse’s account will be considered as received from a third party and not from the decedent’s retirement account, meaning the surviving spouse cannot roll those proceeds directly into her account and will be subject to taxes on that distribution of funds.
There is an exception to this rule. If the funds have not been distributed and the surviving spouse is the executor of the estate, the funds may be rolled over into the surviing spouse’s retirement account within 60 days.
Even under these circumstances where the surviving spouse does eventually receive the funds, there are additional fees and work that must be done to ensure this is so. It’s best to prepare ahead of time and name both a primary and contingent beneficiary.
Please let us know how we can help you best plan for your retirement.