Changes to Your Retirement Account While Married
Some retirement plans require spousal consent to validate changes or other actions like withdrawals and rollovers. This rule generally applies to qualified retirement plans or defined benefit plans. We’ll break down these rules and provide guidance on how to navigate this crucial aspect of estate planning.
What Are Retirement Accounts?
Retirement accounts, including 401(k)s, IRAs (Individual Retirement Accounts), and pensions, often come with unique rules regarding beneficiary designations. Beneficiaries are the individuals or entities (like your estate or a trust) that will receive the account's assets upon the account holder’s death.
The Importance of Beneficiary Designations
The beneficiary designation is critical because it takes precedence over a will or other estate planning documents. In other words, the contents of the beneficiary form that you complete for your retirement account will override anything in your Will or Trust relating to the account. If you fail to designate a new beneficiary, or if the designated beneficiary predeceases you, the account could go into your estate and may not pass in line with your wishes.
Its not uncommon to make mistakes when completing beneficiary forms.
Common Situations Where Spouse is Removed as Beneficiary
In most marital units, the preferred plan is for the surviving spouse to inherit the proceeds of the retirement account. There are tax advantages as well but that’s a topic for another post. Real life has lots of twists and turns and there are plenty of situations where one might not want their spouse as a beneficiary of their retirement account:
You have children with someone other than your spouse and want to ensure they receive a portion of your estate;
You’ve become estranged from your spouse but never filed for divorce;
Your spouse has substance abuse challenges;
Your spouse suffers from dementia or other cognitive impairments;
Your spouse has gambling problems; or
You are divorced
Spousal Consent in Retirement Accounts
Spousal consent is the permission one spouse gives the other to perform an act. In this context, it is the agreement between spouses regarding an action that affects a retirement account. Spousal consent may relate to activities like withdrawals, distributions, or the designation of beneficiaries. Generally, a spouse can consent by completing and signing an administrative form.
Some retirement plans require spousal consent to validate changes or actions. This rule generally applies to qualified retirement plans or defined benefit plans. For example, if you want to change a designated beneficiary on your 401(k) account to someone other than the spouse, your spouse must consent. However, the rules are different when it comes to IRAs.
Spousal Consent and 401(k) Plans
In Pennsylvania, federal law, specifically the Employee Retirement Income Security Act (ERISA), requires that contributions made to 401(k) plans by a spouse must receive the consent of the other spouse for certain actions, particularly when it concerns retirement benefit distributions. This is designed to protect the financial interests of both spouses in a marriage.
1. Qualified Joint and Survivor Annuity (QJSA)
When a participant in a 401(k) plan passes away, the benefits typically go to the surviving spouse. However, if the participant wishes to designate someone other than their spouse as the beneficiary, they must obtain written, notarized consent from the spouse.
2. Withdrawals and Loans
If a participant in a 401(k) plan would like to take a loan or withdraw money from their account, spousal consent may also be required. Not all plans mandate spousal consent for loans, but many do, especially if it involves withdrawing a significant sum. Hence, reviewing the specific terms of a 401(k) plan is crucial.
3. Divorce Proceedings
During divorce, a 401(k) plan is often subject to division. A Qualified Domestic Relations Order (QDRO) may be required to ensure that a portion of the retirement plan is awarded to the non-participant spouse. For this to happen legally and equitably, the consent of both spouses during the division of assets is necessary.
401K Rollover to IRA and Spousal Conent
Generally, you can rollover funds in a 401k to an IRA without spousal consent. The regular distribution rules apply in most instances. Married 401(k) account holders who do not want to leave their entire amount to their spouse can elect to receive a lump sum distribution once they become eligible. Then, they can roll those funds into an IRA and designate anyone they prefer as their beneficiary. In most cases, the 401(k) distribution and IRA beneficiary designation will not require spousal consent.
Is Spousal Consent Required for IRA Distribution?
Generally, a spouse does not need consent when taking an IRA distribution because IRAs are not subject to the spousal consent rules under ERISA and the Retirement Equity Act (REA). These laws apply to qualified retirement accounts, one major difference between IRAs and qualified plans.
Is Spousal Consent Required for IRA Beneficiary Designation?
Generally, you do not need spousal consent when changing your IRA’s beneficiary designation. However, you may require spousal consent if you live in a community property state. Community property rules vary from state to state but generally treat assets and debts acquired during the marriage as jointly owned. This includes funds in your IRA that accumulated since you married, assuming you lived in a community property state all those years.
If the IRA owner dies or divorces, the spouse could be entitled to a portion of the funds unless they waive that right. Since the nonparticipating spouse has an interest in the funds, the IRA owner must obtain spousal consent when designating a beneficiary other than the spouse. Naming someone in your will or trust as the beneficiary of your IRA funds generally does not change the rules — you still need spousal consent, subject to legal exceptions.
Why Consulting an Attorney is Important
The intersection of marital rights and retirement accounts can be complex. It is wise to consult with one of Fiffik Law Group’s attorneys experienced in estate planning and family law to ensure compliance with the law. Our attorneys can help you navigate these requirements, interpret legal documents, and understand your rights and obligations in this process.
By understanding these rules and taking proactive steps, you can make informed decisions about your retirement accounts, ensuring that the benefits you’ve prepared for your future are distributed according to your wishes.