What You Should Know Article Courtesy of Nancy Harris, CMFC, CDFA President, LPL Financial Planner, New Foundation Wealth Group
Same-sex marriages are legal nationwide, and these marriages enjoy the same rights and benefits bestowed by state and federal law on traditional marriages. As a legally married same-sex spouse, you’ll want to be aware of several retirement plan rules that apply specifically to married individuals.
Beneficiary rights If you participate in a 401(k) or similar plan at work, federal law provides that your spouse is automatically the beneficiary of your account in the event of your death. You can name someone else as beneficiary, but only if your spouse agrees in writing. IRAs aren’t subject to this federal law, although your state may impose its own similar requirements.
Even without a requirement that you do so, naming your spouse as beneficiary is often the best choice. One reason is that a spouse beneficiary has more options and flexibility in terms of post-death distributions than a non-spouse beneficiary. For example, spouse beneficiaries generally may take required distributions from employer plans and IRAs at a later date, and over a longer period of time, than non-spouse beneficiaries.
Your surviving spouse may also have two other options that are not available to other beneficiaries. First, your surviving spouse may choose to roll over inherited IRA or plan funds to his or her own IRA or plan. Second, your surviving spouse may elect to simply leave the funds in an inherited IRA and treat that account as his or her own account. In either case, the potential may exist for significant estate planning and income tax benefits. This is because your surviving spouse may defer taking distributions of the inherited funds until his or her own required beginning date and may also designate new beneficiaries of his or her choice (your children, for example).
Your right to a qualified domestic relations order While we all hope our marriages will last forever, unfortunately that’s not always the case. The issue of how retirement plan benefits will be handled in the event of a divorce is especially critical for spouses who may have little or no retirement savings of their own.
Under federal law, employer retirement plan benefits generally can’t be assigned to someone else. However, one important exception to this rule is for “qualified domestic relations orders,” commonly known as QDROs. If you and your spouse divorce, you can seek a state court order awarding you all or part of your spouse’s retirement plan benefit. Your spouse’s plan is required to follow the terms of any order that meets the federal QDRO requirements. For example, you could be awarded all or part of your spouse’s 401(k) plan benefit as of a certain date, or all or part of your spouse’s pension plan benefit. There are several ways to divide benefits, so it’s very important to hire an attorney who has experience negotiating and drafting QDROs. The key takeaway here is that these rules exist for your benefit. Be sure your divorce attorney is aware of them. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member
FINRA/SIPC.