For most married people, the strongest default answer to the question of who should be your beneficiary is your spouse, because federal law protects spousal rights on employer retirement plans and the tax code gives a surviving spouse options with inherited retirement accounts that no one else gets. Past that, the right pick depends on the account, your family, and whether the people you want to provide for can legally or safely receive money outright. A good designation names a specific primary beneficiary, a contingent behind them, and gets reviewed every time your life changes.
One thing to settle before anything else: a beneficiary designation on an account overrides your will. If your will leaves your 401(k) to your daughter but the plan form still names your brother, your brother gets it. Courts treat the form as a binding contract with the financial institution. So the answer to “who should be your beneficiary” is the answer that lives on the form itself, not the one in your estate documents.
Why a Spouse Is the Default for Most Married People
On employer-sponsored plans like 401(k)s and traditional pensions, you don’t have unlimited choice. Under ERISA, those plans must pay benefits in a form that includes your surviving spouse unless your spouse signs a written waiver consenting to a different beneficiary.1Office of the Law Revision Counsel. 29 U.S. Code 1055 – Requirement of Joint and Survivor Annuity and Preretirement Survivor Annuity The consent has to be in writing, acknowledge what the spouse is giving up, and be witnessed by a plan representative or a notary. A form naming your child or sibling on a 401(k) without that signature is simply invalid, and the IRS treats the failure as a plan qualification problem.2Internal Revenue Service. Fixing Common Plan Mistakes – Failure to Obtain Spousal Consent
IRAs sit outside ERISA, so there’s no federal spousal-consent rule for traditional or Roth IRAs. In community property states, though, a spouse may still have a legal claim to IRA assets accumulated during the marriage regardless of what the form says. Some IRA custodians in those states print a spousal consent line on their forms for exactly that reason.
The other reason to default to a spouse is tax treatment. A surviving spouse who inherits a traditional IRA has three options that no other beneficiary gets: treat the IRA as their own, roll it into their own IRA or qualified plan, or stay a beneficiary and take distributions over their own life expectancy.3Internal Revenue Service. Publication 590-B – Distributions from Individual Retirement Arrangements (IRAs) Treating the account as their own lets the surviving spouse delay required minimum distributions until their own required beginning date and name new beneficiaries. Everyone else is on a stricter clock.
Most non-spouse beneficiaries who inherit an IRA or 401(k) now have to empty the account by the end of the tenth year after the owner’s death under the SECURE Act. Withdrawals from a traditional account are taxed as ordinary income, so a large inherited balance can push the beneficiary into higher brackets. A smaller group called eligible designated beneficiaries can stretch distributions over their own life expectancy: a surviving spouse, a minor child of the account owner (until they reach the age of majority, when the ten-year clock starts), a disabled or chronically ill person, and anyone not more than ten years younger than the deceased owner.4Internal Revenue Service. Retirement Topics – Beneficiary
When to Name Someone Other Than Your Spouse
Plenty of situations call for a different choice. If you’re unmarried, the question is open. If you’re married but want to provide for children from a prior relationship, a charity, or a sibling, you can do it, but on an ERISA plan you need the spousal waiver described above, and on an IRA in a community property state you should get legal advice before filing the form.
Charities are worth singling out. A qualified charity pays no income tax on a distribution from a traditional IRA or 401(k), so it receives the full value of the account. A family member receiving the same account pays ordinary income tax on every dollar withdrawn. If you plan to leave money to both charity and family, directing the retirement account to the charity and leaving other assets to family is usually the more efficient split.
You can also name a trust rather than a person. That’s the right move when the person you want to benefit shouldn’t or can’t manage the money directly, which covers the next two categories.
Naming Your Children
A child under 18 cannot legally manage inherited money. Name a minor directly on a life insurance policy or retirement account and the insurer or plan administrator will usually refuse to pay until a court appoints someone to manage the funds, with the delays and legal fees that implies.
The cleaner approach is a trust for the child, with the trust named as the beneficiary. The trust document controls how and when the money is distributed and who manages it. For smaller sums, a custodial account under the Uniform Transfers to Minors Act works, though the child takes full control at the state’s age of majority, usually 18 or 21.
Per Stirpes or Per Capita When You Name Multiple Children
Once you name more than one person, the form will usually ask what happens if one of them dies before you. The choice between per stirpes and per capita can redirect substantial amounts of money.
Per stirpes means by branch. If you name three children equally and one dies before you, that child’s third goes to their own children, your grandchildren. The family branch stays intact.
Per capita means per head. Same three children, same early death, but now the surviving two children each take half. The deceased child’s children get nothing from this designation.
Neither default is right for everyone. The real mistake is leaving the choice blank, because the fallback varies by institution and by state law. If the form has a per stirpes checkbox, mark it deliberately one way or the other.
Naming a Beneficiary Who Receives Government Benefits
If someone you want to provide for depends on Supplemental Security Income or Medicaid, do not name them directly. SSI limits countable resources to $2,000 for an individual and $3,000 for a couple.5Social Security Administration. Understanding Supplemental Security Income SSI Resources An inheritance that crosses that threshold, even briefly, can cut off benefits that pay for food, shelter, and medical care.
A special needs trust (also called a supplemental needs trust) is the standard fix. The trust holds the inherited assets and a trustee pays only for expenses that government benefits don’t cover. Because the beneficiary doesn’t own the trust assets, eligibility is preserved. The language matters here; if the trust document doesn’t limit distributions correctly, the government can still count the trust assets against the beneficiary.
Always Name a Contingent Beneficiary
For every account, name a backup. If your primary beneficiary has already died when you pass and there’s no contingent, most institutions default the payout to your estate. That sends the money through probate, makes it public, and strips away the most favorable tax treatment on retirement accounts. An estate cannot treat an inherited IRA as its own the way a spouse can, and may not qualify for the life-expectancy stretch available to eligible designated beneficiaries; the balance can need to come out, and be taxed, within five years.6Internal Revenue Service. Required Minimum Distributions for IRA Beneficiaries
When you fill out the form, give the institution enough to identify each beneficiary without ambiguity: full legal name, relationship, date of birth, and ideally a Social Security number and address. “My children” invites disputes. Name each person and assign percentages that add to 100.
Review After Marriage, Divorce, Birth, or Death
Beneficiary designations age badly. Review them after marriage, divorce, the birth or adoption of a child, the death of someone you’ve named, or a major financial change. In the absence of any of those, a check every two or three years catches drift.
Divorce is where the stakes are highest, because the common assumption that divorce automatically removes an ex-spouse is wrong for a large category of accounts. In Egelhoff v. Egelhoff, the U.S. Supreme Court held that ERISA preempts state laws that would automatically revoke a former spouse’s beneficiary status on an ERISA plan after divorce.7Legal Information Institute. Egelhoff v Egelhoff (00-530) 532 U.S. 141 If your 401(k) or group life insurance form still names your ex-spouse when you die, the plan administrator pays your ex-spouse. The divorce decree does not override the form. Your will does not override the form.
Some states do revoke a former spouse’s status on non-ERISA accounts like IRAs and individual life insurance by statute, but you shouldn’t rely on that. File fresh beneficiary forms on every account within days of a divorce, not months.
One boundary worth knowing: every state has some version of a slayer rule that disqualifies a person who intentionally and feloniously caused the account owner’s death from inheriting, treating them as if they predeceased the owner so the assets fall to the contingent beneficiary or the estate.