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Understanding Self-Directed IRA & 401(k) Beneficiary Rules

25 April, 2017

Understanding Self-Directed IRA & 401(k) Beneficiary Rules

Investors with a 401(k) or IRA account might not be able to control stock market performance, but there are definitely other things that are totally within their realm of influence, including some of the most basic aspects of account management, like naming beneficiaries and handling rollovers when you retire or switch employers. While this might sound simple enough on the surface, many investors wind up unknowingly disinheriting their loved ones, or leaving investments in a stagnant 401(k) that is heavily invested in low-performing stocks and bonds. 

“Oftentimes, when we change jobs, we get so wrapped up and focused on the new job, we tend to forget about our old 401(k) plan,” wrote CNBC. “Many people tend to leave their 401(k) with their old employer, claiming that they’ll deal with it later.”

401k Beneficiary Designation

As you can imagine, in all too many cases “later” eventually turns into “never,” which can eventually lead to major problems and confusion with the IRA account beneficiaries, as well as poor overall performance in the account over time. Here’s how it happens:

First, the investor leaves a 401(k) with an old employer, which means it could be heavily invested in company stocks, or low-performing funds. Also, when he or she signed up for that retirement account, they listed a boyfriend/girlfriend as beneficiary who is no longer in the picture. As time passes and the investor eventually gets married to someone else, becomes even busier with work, has kids and – ultimately –completely forgets about that old 401(k) retirement account. In this case, an old boyfriend or girlfriend could wind up with your hard-earned retirement account! Albeit, the performance would have been poor, compared to what the investor could have achieved by rolling the assets into a Self-Directed IRA account – provided they understand the rules. 

“Another common error is when the beneficiary form doesn’t have enough space to list all of the names of the beneficiaries,” wrote CNBC.

Understanding Self-Directed IRA & 401(k) Beneficiary Rules

Also, it’s all too easy for account owners to list beneficiaries incorrectly, which happens more often than you might think. For example, a common error investors make is mistakenly naming everyone the primary beneficiary when the intent was to list one person as a primary and the remaining people as contingent beneficiaries.

Finally, when it comes to beneficiary designation, be sure to consider the “per stirpes” versus “per capita” question. If not specifically designated, the assets will be automatically allocated “per capita” upon your death, but that can cause problems. Here’s why: 

Imagine an investor – Mr. Jones – with two adult married children who he lists as beneficiaries on his IRA account at 50 percent each. Since he does not specify they are to be “per stirpes,” if one of his children happened to pass away before Mr. Jones himself, all of the assets would go to the other child, instead of to the deceased child’s surviving spouse and/or grandchildren. Had Mr. Jones listed both of his children at 50 percent beneficiaries “per stirpes,” the assets would be divided equally between his children if they were both still alive, or their families in the event that one of them happened to be deceased at the time Mr. Jones passed away.

Self-Directed IRA Rules

Even if your beneficiaries are properly designated, however, there’s no guarantee that your 401(k) is invested properly, especially if the decisions are being left up to someone else. All too often, investors just assume someone must know what they’re doing and be looking after their retirement account, but that is rarely the case – especially with company 401(k) accounts. 

We know conventional investing doesn’t work, with most investors lucky to get 5% returns after inflation, so take control of your retirement account now. By rolling the assets into a Self-Directed IRA account, investors will enjoy a much greater degree of flexibility and a wider array of investment options, which can also lead to much higher returns. For example, some real estate investments in popular vacation destinations are offering 8-12% returns, and Self-Directed IRA real estate rules permit buying investment properties with assets. 

Understanding Self-Directed IRA & 401(k) Beneficiary Rules

“Employer-sponsored 401(k) plans usually include investment options such as stock funds, bond funds and money market accounts,” wrote Zacks. “When you invest your money in a self-directed individual retirement account, your investment options are much broader and include annuities, certificates of deposit and individual securities.” 

Also, 401(k)s tend to have high administrative fees in addition to much more limited investment options. Investors can roll money from an IRA to a Self-Directed IRA upon reaching the age of 59 ½, or upon leaving the company, thereby retaining the tax-deferred status of the retirement account. Prior to the age of 59 ½, you can also roll your account earnings and some of your own after-tax contributions, as well as funds held in your current employer’s 401(k) that you previously rolled into that account from a former employer’s 401(k), provided the cash was originally contributed by your former employer. 

Would you like to know more about how to invest in real estate using an IRA account? Click the link below and discover why buying real estate with an IRA in an ideal location can diversify your portfolio and provide a hassle-free revenue stream to dramatically improve your ROI!

Want to Know How to Invest in Real Estate with your Self-Directed IRA?

Topics: Real Estate Investment 401k IRA