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If you are considering a second marriage and have a 401k plan with your employer and wish to keep your beneficiaries, your children for example. Consider converting your 401k providing you have left your employer to an IRA rollover. This strategy needs to be done before the second marriage.
You might think that your beneficiary form supersedes any other form, think again. Federal ERISA states a spouse’s right trumps a beneficiary designation.
According to federal rules a spouse’s right to plan assets is vested immediately upon marriage. In order to pass retirement plan assets to another rather than a spouse, the spouse needs to sign a waiver giving up their rights to the 401k plan.
Once married a spouse would need to consent to any changes that would exclude the spouse from the retirement assets.
Another advantage to converting the 401k plan is the fact that IRA rollover offer far greater benefits than employer sponsored retirement plans. A spouse is not required to be a beneficiary of their spouse’s IRA.
The owner of an IRA account may name whomever they choose as their beneficiary. Fact is they may also have multiple IRA each with separate beneficiaries.
Additionally, IRA offer more flexibility when it comes to choosing what assets goes into the IRA. Typically, 401k plans have far fewer options available when it comes to selecting the securities that makes up the plan.
Typically, a 401k plan offers a dozen or so investment options where an IRA offers essentially unlimited choices. In my mind it’s a no brainer.
To avoid the assets going to the wrong beneficiary, consider a transfer before marriage into an IRA or even better a Roth if you can afford the upfront payment of taxes. Otherwise after marriage you will need to get the spouse to sign a waiver and make sure you also remove the spouse from the beneficiary designation form.
Daniel Iuculano
Financial Planner
