401(k) vs. IRA: Do You Know Your Rights?

Our friends at DP Legal Solutions discuss how it is easy to assume that all retirement accounts are created equal. However, the legal “rights” associated with a 401(k) are vastly different from those of an IRA. We help you navigate these nuances so your estate plan is airtight. An estate planning lawyer can help ensure your retirement assets are properly structured and aligned with your overall plan. Contact an experienced lawyer today for a comprehensive review of your retirement portfolio.

Employer Plans and Spousal Rights

If you have a 401(k) or another employer-sponsored plan (known as a 401(a) plan), federal law (ERISA) dictates who gets the money when you die. Regardless of who you name on your beneficiary form, your surviving spouse is legally entitled to 100% of those assets unless they have signed a specific, written waiver.

This creates a major “hitch” for second marriages. Even if you have a prenuptial agreement stating that your children get your 401(k), federal law may ignore that agreement unless a proper waiver is signed after the marriage ceremony.

IRAs: More Control, Different Risks

IRAs (Individual Retirement Accounts) are governed primarily by state law. Because they are not employer-sponsored, they don’t carry the same federal spousal-protection requirements. This gives you more freedom to name whoever you want as a beneficiary without needing a spousal waiver.

• Access: You can generally access IRA funds whenever you want, though you may face a 10% penalty if you are under $59\frac{1}{2}$. 401(k)s often restrict access until you leave your job.

• Creditors: 401(k)s offer powerful federal protection against creditors. IRA protection is based on the laws of your specific state.

• Divorce: Dividing a 401(k) requires a complex document called a QDRO (Qualified Domestic Relations Order). An IRA can usually be divided much more simply.

Why This Matters for Your Plan

If you are planning to leave assets to anyone other than a spouse, you must know which rules apply to which account. A mistake here could mean your children receive nothing from your 401(k), even if that was your stated intent in your Will. To ensure your accounts are correctly titled and designated, contact an experienced lawyer today.