Who Should I Make My 401(k) Contingent Beneficiary?

It is safe to say that 401(k) accounts don’t have a specified expiration date. The defined contribution plans vary in terms of what is in them. And usually, you can only begin taking penalty-free distributions from these accounts once you reach the age of ​59.5 years​. So, if you are a particularly excellent investor, the savings within your 401(k) could outlive you by many years. For that reason, you need to designate both primary and contingent beneficiaries for your employer-sponsored accounts.

Who Is a Beneficiary?

A beneficiary is an individual or entity that you name so that they can receive the benefits you have accumulated once you die. It could be a spouse, child, trust or charitable organization.

In the case of 401(k)s, a beneficiary is whoever will receive the funds in your retirement account when you pass on. Naming a 401(k) beneficiary is crucial for various reasons:

  • It ensures the state does not determine who gets to benefit from your retirement savings on your behalf. If that happens, everyone may ignore your wishes.
  • It prevents your beneficiaries from undergoing an expensive probate process, which may end up taking up some of the funds you leave behind. Such a process may also lead to unnecessary disputes.
  • It enables your loved ones to get the 401(k) fund with minimal delay.

Knowing the importance of designating a beneficiary for your 401(k), you should ensure that you do so on two levels:

  • Name a primary beneficiary of 401(k)
  • Name a contingent beneficiary of 401(k)

Primary and Contingent Beneficiary

A primary beneficiary is someone who has the first claim to your 401(k) funds when you die. It does not have to be one person. It could be several people, all of whom have a right to your retirement funds.

On the other hand, a contingent beneficiary will have the secondary claim on your retirement earnings and contributions. If the primary beneficiary is dead or cannot be found, the contingent beneficiary of 401(k) will then claim the assets you have left behind.

Choose a Contingent Beneficiary for 401(k)

If you want to designate a contingent beneficiary for your 401(k) account, follow the steps below.

  1. Write down a list of everyone you would like to benefit from your retirement accounts when you die. It could be a charity, your children, parents, spouse, colleagues, trust, etc.
  2. Rearrange your list of names based on whom you would like to be primary or contingent beneficiary. Usually, the spouse has strong legal rights to your 401(k). So, you may have no choice in naming that person as your primary beneficiary.
  3. When establishing your 401(k), fill in the form section that designates contingent beneficiaries. However, if you want to update the beneficiary information, ask for and fill in the beneficiary designation form. The form is usually accessible online.
  4. Ensure the form has relevant details of your secondary beneficiary. And it would help if you were as specific as possible. For example, if you have several beneficiaries, specify the percentage of your 401(k) they will have a right to. But if you want to name a trust as your 401(k) beneficiary, consult a financial or tax advisor first because the process can be pretty complicated.
  5. Once the designation is complete, inform your contingent beneficiaries about what you have done. That way, they will know what to do when you die and the primary beneficiary cannot claim your 401(k) assets.

Who to Name a Contingent Beneficiary

Greed is a common human weakness. So, you need to ensure that the 401(k) contingent beneficiary is not the kind of person who will eliminate those with a prior claim to claim the assets you leave behind. That would be disastrous.

It is also not wise for you to name a minor (as defined by each state) as a contingent beneficiary. That’s because it leads to a lengthy probate process. In the meantime, the funds in your 401(k) will go to the child’s legal guardian, who may end up squandering it.

When choosing contingent beneficiaries, you need to make a habit of updating your 401(k) information regularly. If you change your mind or someone goes missing or dies, make changes to reflect that. In addition, if you get divorced or remarried, it also makes sense to update your 401(k) contingent beneficiary information.

Remember, if no beneficiaries can access your 401(k) funds, they become part of your estate, and disputes could arise on who gets to claim them. There is no point in leaving a lot of retirement savings behind if your loved ones are not going to enjoy them, is there?