Think back to your first day at the company where you spent most of your career. Somebody from HR handed you a stack of forms. Tax withholding. Direct deposit. Health insurance. And somewhere in that stack, a one-page beneficiary form for the retirement plan.
You filled it out in about 30 seconds. Maybe you were single. Maybe you were newly married. Maybe you named your parents.
That 30-second form may now control more of your money than your will does.
The paperwork that outranks your will
Most people assume their will decides who gets what. For a lot of families, that's only partly true.
For long-tenured professionals, the biggest assets are often a 401(k), 403(b), or TSP, an IRA rolled over from an old employer, a pension, and life insurance through work. Every one of those passes by beneficiary designation, the name on file with the plan or the insurance company, not by the instructions in your will. The same goes for bank and brokerage accounts with payable-on-death or transfer-on-death instructions.
That's why I keep coming back to beneficiary forms. I wrote about them in my summer checklist for CFP Board's LetsMakeAPlan.org, Smart Summer Moves for Retirement Legacy Planning. Here I want to show you why they matter even more after a long career.
How seriously the plans take that form
In 2009, the U.S. Supreme Court decided a case about a man who had named his wife as beneficiary of his retirement plan in 1974. They divorced in 1994, and in the divorce decree she gave up her rights to his benefits. But he never changed the form. When he died, the plan paid his ex-wife, and the Court said the plan was right to follow the form on file.
Plans are generally required to follow their own paperwork. If the form says your ex-spouse, your late parent, or "my estate," that's likely where the money goes, no matter what you intended.
The tax bill that comes with the gift
There's a second surprise waiting for the people you leave money to.
Under the rules that took effect in 2020, most adult children and other non-spouse beneficiaries who inherit a traditional IRA or 401(k) have to empty the account within 10 years. If you had already started your own required withdrawals, they may also have to take money out every year along the way. Every dollar comes out as taxable income to them.
Now think about who those beneficiaries usually are: grown children in their 40s and 50s, often in their own peak earning years. The money you saved for 30 years can land on top of their salaries and be taxed at their highest rates.
That's where legacy planning and tax planning become the same conversation. Which accounts you spend first, whether to make Roth conversions while you're in a lower bracket, and which accounts you leave to which people can all change how much of your legacy actually reaches your family. I wrote more about that balance in What Yellowstone's Wolves Can Teach You About Balance in Retirement.
The pension decision is a legacy decision too
If you have a pension, the survivor option you pick at retirement is one of the biggest legacy choices you'll ever make, and you only get to make it once. I walked through how I think about it in The Pension Decision You Only Get to Make Once.
Legacy isn't only what you leave
One more thing I tell clients. Your legacy isn't just the check your family receives after you're gone. For many of the families I work with, the plan already supports the life they want, and there's room to help the people they love while they're still here to see it. A grandchild's tuition. A down payment. A family trip everyone remembers.
Giving while you're living lets you watch your money do what you hoped it would. Just make sure the plan supports it first.
Your legacy checklist
Here's where I'd start:
- Pull every beneficiary form. Employer plans, IRAs, annuities, life insurance, and any payable-on-death or transfer-on-death accounts. Request copies from each company rather than relying on memory.
- Check for the life changes. Marriage, divorce, a death, a new grandchild, a child who shouldn't receive money outright. Any of these can make an old form wrong.
- Name contingent beneficiaries, so the money has somewhere to go if your first choice isn't living.
- Make sure the forms and your estate documents agree. Your attorney drafts the will and trust. The beneficiary forms have to point the same direction.
- Build your legacy folder and tell at least one trusted person where it is.
- Have the conversation. Your family will have an easier time carrying out your wishes if they've heard them from you.
If you haven't looked at your beneficiary forms since your first week on the job, let's look at them together and make sure your legacy goes where you intend. Start with a 30-minute Exploratory Call.
This article is for general education and is not individual tax or legal advice. RC Planners does not draft legal documents; work with your estate planning attorney on wills, trusts, and powers of attorney, and with your CPA on the tax treatment of inherited accounts. Beneficiary rules vary by plan, account type, and state law, and some beneficiaries, such as surviving spouses, have different options.
Sources: Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 555 U.S. 285 (2009); SECURE Act of 2019 and IRS final regulations on inherited retirement account distributions.