Spouse’s rights with IRA vs. 401(k), other questions
Q: My husband recently rolled over his 401(k) to an IRA. Although I have been named as a beneficiary for part of his IRA, he has named his children from his first marriage as the beneficiary of most of the value of the IRA. I was under the impression that ERISA protected the spouse of a 401(k) owner, and that the owner could not name beneficiaries other than the spouse without the written approval of the current spouse. Is he allowed to do this without my approval?
A: Unfortunately, the answer is that he is allowed to name beneficiaries other than his spouse after he rolls over his 401(k) to an IRA. ERISA does provide spouse protection if the funds are held in a 401(k). However, an individual who owns a 401(k) can roll over his account to an IRA without spousal approval. ERISA regulations do not apply to IRAs. Once the account has been rolled over to an IRA, the owner of the IRA is free to name nonspouse beneficiaries if he or she chooses.
I ran this situation by the attorneys from the Pension Rights Center, who have expertise in all aspects of retirement plan issues. This is their representative’s response:
“Basically, unless the 401(k) plan or other defined contribution plan offers or requires a joint and survivor option (which most don’t), the participant does not need spousal consent to be able to take loans or distributions — this includes rollovers to an IRA. The only real protection is the right to be designated as the beneficiary.
“In order for the plan to be exempt from the QJSA (qualified joint and survivor annuity) requirement (which is what drives spousal consent), it must satisfy three requirements: the death benefit of the plan must be payable in full to the surviving spouse if the spouse hasn’t consented to another beneficiary; life annuity options cannot be elected and have not been elected; and the benefits in the plan cannot have come from another qualified plan required to provide a QJSA.”
A bill in Congress, the Women’s Retirement Protection Act, aims “to amend ERISA to provide that any plan not subject to Section 205 shall require spousal consent for distribution (with a few exceptions),” the representative added.
The bottom line is that unless ERISA is amended, in most cases, the owner of a 401(k) can elect to roll over his or her 401(k) or other defined contribution plan to an IRA, and then be able to name nonspouse beneficiaries without the consent of his or her spouse.
Q: In a recent article, you made a distinction between “above the line” deduction and “below the line” deduction regarding cash charitable deductions in 2021 for individuals who don’t itemize. What is the difference? Is one better than the other?
A: An above-the-line deduction reduces gross income to arrive at adjusted gross income (AGI). A below-the-line deduction reduces AGI after all the above-theline adjustments are made. One is not better than the other. Both charitable deductions have the same impact regarding lowering the tax you owe.
Q: I recently read your article
discussing investment in TIPS. I have been investing in Series I bonds and have been unhappy with the return on investment. Should I sell my I bond investment and reinvest in TIPS.
A: The return on both investments depends on changes in the cost-of-living index. On a long-term basis, the returns will be similar. I would not advise selling I bonds because of the apparent higher return of TIPS. If you hold your I bonds to maturity, you will receive an increase in your investment at maturity based on the change in the cost of living from the time of your initial investment. You can redeem I bonds after one year; however, if you redeem them prior to five years, you are penalized three months’ interest. Interest and increases in value of both investments are taxable. But increases in value for TIPS are taxable yearly, while with I bonds you can postpone taxes until the bonds mature. Side-by-side comparison is available at TreasuryDirect.gov.