If you have children in your life, chances are you probably lose sleep at night thinking about their financial futures. We all want to make sure the people we love will be okay once we’re gone, and that’s why it’s important to consider the plans you’ve got in place for when that day comes.

A critical part of those plans should be making sure your children can get access to your retirement account after your death.

A retirement account, like a 401(k), is one of the most lucrative financial assets you’ll be able to pass on to your loved ones. However, you have to ensure you’ve followed the right steps in naming them as beneficiaries to set them up for better financial futures.

Read on to find out whether a minor can be a 401(k) beneficiary, the rules that need to be followed, and the benefits of setting up a trust for your children.

Key Takeaways

• Most 401(k) plans will let you name a minor as a primary or secondary beneficiary.

  
  

• If you pass away before your child is a legal adult, the court will appoint a guardian or conservator to manage the account funds. 

  
  

• By setting up a trust as your 401(k) beneficiary, you’ll get more flexibility and control over how and when your children can access the wealth you pass on to them.

Can a Minor Be Named Individually as a Beneficiary?

A minor can be named individually as the beneficiary of a 401(k) account. There aren’t any specific federal rules in the US that restrict who you name as a beneficiary; therefore, most plans will let you name your children as account beneficiaries regardless of their age.

You’re also normally allowed to name your child as the contingent beneficiary for your retirement account. That means if the primary beneficiary (like your spouse) passes away before you do, your child will become the primary beneficiary.

That said, it’s worth pointing out that rules do sometimes vary between different states or retirement plan facilitators, so you should always check with your plan provider before you start laying the groundwork for naming beneficiaries. 

What are the Benefits of Naming a Minor as the Beneficiary of Your Retirement Account?

By making your kids the beneficiaries of your 401(k), you’ll get some much-needed peace of mind. You can rest easy knowing that if anything happens to you and your partner (if you have one), that wealth will be passed along to support your children in meeting their own future financial goals.

But there are a few potential drawbacks to be aware of, too.

“Although it's completely legal to name a minor as a direct beneficiary, there can potentially be complications. Minors generally cannot take direct control of an inheritance, so the court may need to appoint a guardian to manage the funds, which can be a costly and time-consuming process,” explains Michelle Delker, a CPA and CFO at The William Stanley Group.

The best way to avoid this headache is to be proactive by appointing a guardian or conservator for your children in your will. 

Doing so will remove the biggest legal hurdle toward making sure your children get access to the wealth you’ve left them‌ with. Yet even then, Delker points out that gaining this access can sometimes be an issue‌, too.

“When the beneficiary reaches the age of majority (18 or 21, depending on the state), they would have unfettered access to these funds, which might not always lead to the best financial decisions,” she says.

Fortunately, there's a common solution you can use to prevent your kids from overeager spending when they finally inherit the contents of your retirement account. 

We’ll get to that shortly. 

First, let’s take a quick look at the rules you’ll need to follow if you plan on naming a minor as the beneficiary on your 401(k) or individual retirement account (IRA).

What Are the Rules for Child Beneficiaries?

“Naming a minor as your beneficiary is as simple as listing that minor's name and pertinent information as the beneficiary on the IRA forms you fill out when opening an IRA account,” ‌explains Colby McFadden of Quiver Financial Holdings.

“However, that is not where people may want to focus their attention. It is what happens after that, in the event the account owner dies and the minor beneficiaries inherit the funds is where complications can arise.” he continues.

The rules on transfers to beneficiaries were recently overhauled thanks to the passing of the Setting Every Community Up for Retirement Enhancement (SECURE) Act in 2019, which largely centers on the age of the beneficiary in question.

Under the SECURE Act, beneficiaries will normally need to receive the entire contents of the account within 10 years of your death. But this depends on how your 401(k) administrator classes your beneficiaries. 

“The Secure Act separates beneficiaries into three categories: eligible designated beneficiaries, designated beneficiaries, and others that are not considered designated beneficiaries,” McFadden says.

There are a range of specific guidelines around these categories, but the key point is that your kids need to be under 18 to be considered eligible designated beneficiaries.

If they’re over the age of majority in your state, they fit into the designated beneficiaries category. The “others” category of beneficiaries normally refers to non-living entities like trusts.

Assuming your kids are classed as eligible designated beneficiaries when you pass away, their mandatory 10-year payout period won’t start until they turn 21. This means they have to receive all the funds in your retirement account by age 31.

That being said, the law does require your child to get required minimum distributions (RMDs) from your account until they’re an adult. 

A guardian or conservator will need to oversee these distributions and it’s important to note that your child will need to pay income tax on RMDs.

Why Create a Trust for Your Children?

There can be a couple of legal complications when you appoint minors as the beneficiary of your 401(k) and you might also be concerned about their financial literacy and how they’ll spend the money when they inherit it, which is why you may want to consider setting up a trust.

Instead of naming your child as your retirement account beneficiary, an increasingly popular option is to name a trust as your account beneficiary. You can then, in turn, name your children as beneficiaries of that trust. 

This process will give you slightly more control over what happens after your death.

“Opting for a family trust offers a layer of control beyond the usual parameters. It allows you to instill your values by specifying conditions for disbursements,” says John Grace, president and founder of Investor's Advantage Corporation.

“For instance, you can stipulate that funds be allocated for educational purposes, offering a lasting impact on the minor's life trajectory,” Grace explains.

You could also stipulate within the rules of your trust that your child can’t have the funds until they turn 25 rather than 21, or that the contents of the trust are disbursed in equal amounts over a certain number of years.

The two of the most popular types of trust for this purpose are conduit trusts and accumulation trusts:

• Conduit trusts require all RMDs from your retirement account to be given to the minor in the same year that the trust receives it. Any sum beyond these required distributions can sit in trust at the discretion of the grantor’s wishes.

  
  

• Accumulation trusts don’t require RMDs to be paid immediately to beneficiaries, meaning the funds can be held in the trust until the conditions of access that you set are met.

Although both of these trusts give you more control over how and when your children spend the money in your 401(k), it’s important to note that the SECURE Act’s 10-year rule still applies. 

That means the full contents of your 401(k) need to be passed on to your child beneficiary by the time they turn 31.

Guaranteeing Compliance and Staying Organized

Regardless of whether you opt to name a minor as an account beneficiary or set up a trust to disburse the contents of your 401(k), you must collect and maintain an organized database that includes all the documentation associated with your decision.

This includes a range of items like your will, 401(k) policy documentation, your child’s birth certificate, information about a potential guardian, a trust document, and everything in between.

That’s where an online Family Operating System® like Trustworthy can offer you peace of mind. Trustworthy lets you securely store digital copies of all your essential family documents in one place for easy access when the time comes.

You can curate, manage, and share necessary documentation with your financial planner, wealth advisor, accountant, and beneficiaries for collaboration and to ensure that all rules associated with your 401(k) or trust are upheld.

This guarantees that all required documentation that your children need to inherit the wealth you’ve built is always safe and those documents will also be accessible to the people who need them if something happens to you.

Get organized for the future using Trustworthy.

Frequently Asked Questions

​​What is the Difference Between a 401(k) and an IRA?

Although a 401(k) plan and an IRA are both retirement accounts, 401(k)s are offered through your employer. You must set up your own IRA, which is normally offered by a bank or broker.

How Many Beneficiaries Can You Have on a 401(k)?

Most 401(k) plans will let you name up to 10 primary beneficiaries. You can also typically name up to 10 secondary beneficiaries.

Can a Non-US Citizen be a 401(k) Beneficiary?

Yes, most 401(k) plans will let you name a beneficiary whether they’re a permanent US resident, temporary worker, or a non-resident alien.