When it comes to investment accounts like 401(k)s and IRAs, financial professionals generally say it’s best not to look at your accounts too much.
The general idea is that as long as you have a broadly diversified portfolio that matches your risk tolerance, there’s not much point in worrying about the day-to-day fluctuations of your investments — instead, sit back and watch compound interest work its magic over the decades you’ve invested.
But there’s one big exception to this rule, and it has nothing to do with the stocks, exchange-traded funds, or mutual funds you own: If you don’t keep your beneficiaries up to date by checking regularly, you could make costly mistakes, says Ed Slott, CPA and founder of IRAHelp.com.
“This is the biggest mistake most people make,” he says. “They think it’s all taken care of, but the beneficiary forms take precedence over the will. Most people don’t know that, and then they don’t update their beneficiary forms.”
If you haven’t updated your beneficiary since opening your account, it’s worth checking as soon as possible.
Update your beneficiaries now to avoid disaster later
When you die, the brokerage or plan administrator will distribute your assets to the people you designate as beneficiaries. If you don’t designate a beneficiary at all, your loved ones could find themselves caught up in an often lengthy and difficult court battle called probate over who gets the money.
To designate a beneficiary, you must log onto your brokerage or plan administrator’s website and enter information about the person you want to beneficiary of your assets (usually their name, date of birth, and optionally their Social Security number).
This process usually only takes a few minutes, and you probably did it easily when you opened your account. So why do you need to go through it again? Because things can change. If you die before you change your beneficiary, your savings could go to the wrong person.
Slott cites the recent example of Jeffrey Rollison, who signed up for a Procter & Gamble 401(k) plan in 1987 and named his then-girlfriend, Margaret Rosinger (née Sjostedt), as the beneficiary. The couple separated in 1989.
“For years, they’d send him reminders: ‘We’re going digital, we’re moving your beneficiary forms online, do you want to change them?'” Slott said. “For years, he never made a change.”
So when Mr. Rollison died in 2015, a woman he had separated from decades earlier received about $750,000 that had been stored in his accounts. His heirs fought the inheritance but lost.
To make sure your loved ones don’t suffer the same fate, Slott recommends updating the beneficiaries on all your accounts at least once a year. “You should also keep your ears open for what I call life events,” he says. “Births, deaths, marriages, divorces, the birth of a new grandchild, changes in tax laws — these are the things you need to keep an eye on.”
Beneficiary designations usually take precedence over wills and trusts, and are often paid directly to the individuals you designate by your brokerage or plan provider. Also, find a way to let the person you designate know in advance. For example, at Fidelity, “Beneficiaries must contact Fidelity directly to receive their assets,” reads company policy. “We distribute your assets to beneficiaries without the need for a will or other legal document.”
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