You're dead: Where's your 401k?

By Liz Pulliam Weston

Here's hoping you live a long and healthy life, happily spending every dime that you so painstakingly accumulated in your retirement accounts.

But it might not work out that way. Not everybody gets to the retirement finish line. And while your premature death would be (one hopes) a blow to your loved ones, a mishandled transfer of your 401k account would add more than insult to the injury of losing you:

• Your money could wind up going to the wrong people.

• A big chunk of it could be claimed, unnecessarily, by Uncle Sam.

Here's what you need to know to keep your 401k in the right hands if you're not there to supervise.

Old decisions can come back to haunt

If you're married when you die, then by federal law, your spouse is entitled to inherit your 401k unless he or she signed a waiver giving up that right, estate-planning attorney Burton Mitchell says. That's true even if you identified someone else when you filled out the paperwork to start contributing to the plan.

The exception is if you're part of a same-sex couple. Federal law doesn't recognize same-sex marriages, so your spouse wouldn't have automatic inheritance rights.

If that's the case, or if you're not married, the money in your account would be handed over to the person or people you listed as beneficiaries when you signed up.

Remember way back then? Maybe you identified the person you were married to at the time or a cousin you now haven't spoken to in years. Problem is, what you said back then goes, even if your circumstances have changed dramatically and you'd rather someone else inherited the money.

Naming children as beneficiaries can be tricky as well. If the kids are minors when you die, a court may not let them have the money outright and may name a trustee -- which could be your ex-spouse if you're divorced. If you want to have control over who manages the money, you'd be smart to have a will or a living trust drawn up that creates a separate trust for the kids, then name that trust as the beneficiary.

Video: How much do you pay for your 401k?

Tax-deferred status is not automatic

Generally speaking, you want 401k money to stay in its tax-deferred wrapper as long as possible. Given enough time, even a small account can grow to impressive proportions if it's not taxed.

Continued: After you die

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