Your retirement accounts can end up in probate after you die. But if you choose your beneficiaries strategically, you can avoid that cumbersome and costly fate—and save your heirs a lot of hassle.

Here's what you need to know.

Key Takeaways

  • Retirement account assets don't have to go through probate, if you designate beneficiaries properly.
  • It's best to name both primary and alternate beneficiaries.
  • Plan to review your beneficiary information once a year or after any major life changes.

Protecting Retirement Accounts from Probate

When a person dies, most of their assets are frozen until their will is validated, all of their debts are paid, and the beneficiaries of their will are identified. That's the legal process known as probate. The probate process can happen rapidly or at a frustrating crawl.

Retirement account assets, however, have the potential to bypass probate. (This includes IRAs, 401(k)s, 403(b)s, and a number of less-common types of retirement accounts.) The reason: When someone opens a retirement account, part of the paperwork includes naming beneficiaries, either one or as many as the account holder likes.

When the account owner dies, the financial institutions where the accounts are held, often referred to as custodians, must hand over those assets to the named beneficiaries. The contract between the account holder and custodian takes the place of the will for these assets, keeping them out of probate. More good news: In this situation, creditors can’t get their hands on the accounts to collect debts.

If retirement accounts don’t go through probate, creditors can’t collect debts from them.

Beneficiary-Selection Mistakes That Can Cost You

There are several ways that retirement accounts can end up in probate, however. Usually this results from a simple misstep: messing up the beneficiary designation. Here are some examples of how that can happen.

Not naming your spouse, if necessary

In community property states—Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin and, in some cases, Alaska—a spouse is entitled to half of anything the other spouse adds to their retirement account during the marriage. That means if the retirement account owner names other beneficiaries in addition to (or instead of) their spouse, the spouse can file a claim to part of the assets; that will send the accounts to probate. (In all states, a married person must name their spouse as beneficiary to a 401(k) unless that spouse signs a special waiver.)

Naming a trust or your estate as beneficiary

Any money distributed to your estate will go through probate. Bill collectors will be able to get their share before the beneficiaries of the estate get theirs. 

Naming a minor as a beneficiary

To avoid probate, it's important to designate someone to manage the money for any beneficiaries who are still minors, until they become adults. Any financial institution can help navigate the Uniform Transfers to Minors Act

Forgetting to name alternate beneficiaries

Designating alternate beneficiaries can keep your accounts out of probate if your primary beneficiaries have died or are otherwise unable to receive the money. 

Not keeping beneficiaries up to date

This all-too-common mistake can lead to some unfortunate surprises after you die. For example, an ex-spouse or former friend who is still listed as your beneficiary could receive the account's assets, rather than your current heirs.

The Bottom Line

Retirement accounts can smoothly and painlessly pass to the beneficiaries named on those accounts as long as you avoid some mistakes. Try to review your beneficiary designations at least once a year or when major life changes happen, such as divorce, remarriage, the death of a former beneficiary, or the birth of a new one.