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Divorce, children and remarriage complicate 401(k) and IRA plans

Complications of federal and state laws concerning the beneficiaries of retirement accounts have placed many widows, widowers, ex-spouses and children in contentious estate lawsuits. Divorce agreements and beneficiary changes after the end of a marriage may not hold up in court if the retirement plan holder dies.

Financial and legal experts say 401(k) plans and beneficiary rights frequently are misunderstood. Federal rules get complicated when a divorced account holder remarries or has children from a previous marriage.

Under the federal Employee Retirement Income Security Act, the rights to a 401(k) account after the death of an employee go to that worker's spouse. A provision exists that makes it necessary for an employee's spouse to approve of any beneficiary change.

Even in cases where employees have designated someone other than a spouse to receive a 401(k), like children from a prior marriage, federal rules prohibit the move. In order for a spouse to be removed as a 401(k) beneficiary, a spouse must formally waive his or her right to the account.

For those who die as single people, including those who have been divorced, a 401(k) will pass to the person listed as the beneficiary by the account holder. Forgetting to remove an ex-spouse's name from a beneficiary form may inadvertently trigger an unwanted transfer of funds.

Cogent Research estimates that most individual American investments are tied up in 401(k) and IRA accounts. The research firm estimates that as much as 60 percent of all assets among investors with at least $100,000 are in one of these two types of retirement plans.

Some financial advisors say moving 401(k) money to an IRA circumvents federal rules. IRAs are governed by state laws, and beneficiary designations are not dependent on a spouse's approval. However, special laws for spouses exist in community property states like Louisiana.

Source: The Wall Street Journal, "Family Feuds: The Battle Over Retirement Accounts," Carolyn T. Geer, Sept. 7, 2011

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