Part of smart financial planning includes planning for what will happen not only during your lifetime, but beyond it. Of course, you want to make sure your family is taken care of, especially when it comes to finances. One way to do that is to name your spouse and your children as beneficiaries to your retirement accounts. Naming and managing beneficiaries is not difficult, but it’s important that you stay on top of it and understand key terms.

What is a Beneficiary?

Beneficiaries are the people you designate to receive funds from any accounts, such as a 401(k), IRA, mutual fund, or life insurance policy. Most people name their spouse as their primary beneficiary. In most states, if you don’t want your spouse as your primary beneficiary on the accounts, you need written consent from your spouse, approving the decision.

You can also list secondary or contingent beneficiaries on accounts. Secondary beneficiaries are useful if the primary beneficiary isn’t receiving the entire amount of money in the retirement accounts. Contingent beneficiaries come into play when the account in question is a joint account and both owners have died at the same time. Investopedia notes that contingent beneficiaries are other family members that aren’t your children, or are close friends who are still alive.

You can list multiple primaries on your accounts. If this is the case, the assets will be divided up evenly unless you state how much each primary will get. If you decide to list how your assets will be divided up between the primary beneficiaries, it’s best to list them as percentages instead of exact dollar amounts.

Why You Need Beneficiaries on Accounts

Beneficiaries help make sure your money goes where you want it to after your death. If you don’t list any beneficiaries, but your family members expect to receive the money from your account, they will enter probate in the court system, which can take a long time to sort out who gets what and costs money.

You also need beneficiaries on accounts because the information in the paperwork will trump any information listed in your wills. So if you don’t list any beneficiaries on your accounts, again, your family will have to go through probate to get the assets divvied up between everyone.

How to Choose Beneficiaries on Accounts

As we’ve already said, your spouse is going to be the primary beneficiary on the account unless you have your spouse’s written consent not be the primary. From there, you can list anyone else as secondary beneficiaries to the accounts. The majority of the time, you’ll list any children you have as secondary beneficiaries. Try not to choose people who are older than you when naming your beneficiaries. This ensures that you won’t have to change the paperwork should a beneficiary die before you.

When to Update Your Beneficiaries

A good rule of thumb is to update the information whenever a significant change happens in your life. This doesn’t apply just to beneficiaries, but any legal document you have. This includes grandchildren being born, you get a divorce from your spouse, your spouse dies, or secondary beneficiaries are no longer able to be the beneficiaries on the account for whatever reason. It’s imperative you update your beneficiaries if you and your spouse divorce, as CNBC reports that there is Supreme Court precedent for ex-spouses receiving the money from the accounts if they’re still listed as the primary beneficiaries.

Designating a Charity as a Beneficiary

Beneficiaries do not have to be people. You can list charities as beneficiaries to your accounts. The Nest notes that the charity will get the amount in the account tax-free as long as the organization is a 501(c)(3) organization. Just like naming people as the beneficiaries to your account, you’ll list the full name of the charity as a beneficiary to the account when you get the forms. As with listing people as beneficiaries on accounts, be sure to give percentages from your accounts you’d like to be donated instead of specific dollar amounts.

If you’re looking into naming beneficiaries for your accounts, you’re able to designate them at any stage in planning, whether it’s when the account is opened for the first time, whenever a significant change happens in your life, or when you’re doing estate planning. Naming beneficiaries help ensure the members of your family can carry on financially if you’re no longer with them without having to deal with the courts figuring out which member of your family gets what.

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