What happens if your designated beneficiary dies and there is still a balance in your retirement plan account to be paid out after your death? It depends on several factors, including the type of retirement account (e.g., IRA or qualified plan), the provisions of the plan, and applicable laws in your jurisdiction. It’s important to consult with a knowledgeable professional who can provide personalized guidance based on your circumstances.
There is a fine distinction between the terms contingent beneficiary and “successor beneficiary.” A contingent beneficiary is one who is designated by the account owner to receive the benefits in the event of the primary beneficiary’s death. Although sometimes used synonymously to contingent beneficiary, a “successor beneficiary” is a broader term and can apply to someone named by the account owner or by the primary beneficiary, or if one is not named, it is the beneficiary that receives benefits according to the retirement plan terms or operation of law.
Here are a few common scenarios that apply in a qualified retirement plan, such as a 401(k) plan, if the account owner and primary beneficiary both pass away.
If the contingent beneficiary is still alive at the time of the account owner’s death, the benefits pass to them as if they were the primary beneficiary.
If no contingent beneficiary was named, or if all contingent beneficiaries have also died, then the terms of the plan document and/or applicable laws will determine how the benefit is distributed. This may involve a specific order of distribution to specified relatives (such as spouse, children, parents, grandchildren, siblings; or the benefits may be distributed to the account owner’s estate and distributed according to their will, or if none, then by legal rules.
The rules for when benefits must be paid out are complex because of changes made to the required minimum distribution rules under the SECURE Act. That law defined three classes of beneficiaries: Eligible Designated Beneficiaries, Noneligible Designated Beneficiaries, and Non-Designated Beneficiaries. The period over which benefits must be distributed depends on whether the account owner died before or after the new law applied, and which type of beneficiary is named to receive benefits. In this situation, it is highly recommended that you speak to a knowledgeable professional for help in determining the required distribution.
It is crucial to periodically review and update beneficiary designations to be sure that retirement benefits will be distributed according to your wishes. This is especially crucial in the event of life changes; such as marriage, divorce, and the birth or death of potential beneficiaries.