Chapters

00:00 Introduction to Beneficiary Naming Strategies

00:32 Understanding Beneficiary Types

01:17 Grouping Benefits With Similar Beneficiary Restrictions & Strategies

01:45 Exploring Joint and Survivor Annuities w/Pop-up

02:47 Beneficiary Strategy for Joint & Survivor Annuities Fixed

03:51 Beneficiary Strategy for Single Life Annuities with Guaranteed Periods

04:46 Beneficiary Strategy for Single Life Annuities

06:13 Tax Implications for Beneficiaries

07:00 Consequences of Not Updating Beneficiaries

07:29 Action Items

08:04 Preview of Next Video and Calls to Action

09:15 Disclaimer

Transcript

Hi everyone, I'm Ryan Earley, vested PERS member, former school finance officer, current financial planner, and host of the PERS Pro YouTube channel. Today, we are breaking down the strategy for naming beneficiaries based on the specific retirement option you choose, the tax implications for your beneficiaries, and what can happen if you don't keep your beneficiaries up to date. Let's get started.

Before we dive into the specific options and strategies, let's define some terms. Primary beneficiary. This is the first person or entity in line to receive benefits upon your death. Secondary or contingent beneficiary. This is the second person or entity in line to receive benefits upon your death. They only receive benefits if all primary beneficiaries pass away before you do. It is critical to understand that regardless of which of the seven PERS benefit options you select, you must name a primary beneficiary. While PERS requires a primary, I strongly recommend naming secondary beneficiaries as well to ensure your benefits don't accidentally default to your estate, which can lead to delays and extra costs as we'll touch on later in this video.

To make the beneficiary strategy exercise easier, we are going to group the PERS benefit options into four distinct groups. Each group has different rules for who you can name and how often you can change them. Joint and survivor pop-up includes option two, four, and four A. Joint and survivor fixed includes option three. Guaranteed period includes option four B. And single life annuity includes maximum option and option one. 

First, let's review the strategy for Joint and Survivor Annuity with Pop-Up, which includes options 2, 4, and 4A. These three options provide a lifetime benefit to one person after you pass. Requirements. You can name only one primary beneficiary. Restriction. The beneficiary must be a person, no trusts or charities. Permanence. You generally cannot change this beneficiary unless they die or you divorce if they were your spouse.  Strategy wise, this is the easiest choice. The person you name should be the one most dependent on your income, like a spouse. Don't overthink it. If they pass away or you divorce, the pop-up provision allows your benefit to increase to the maximum option level, at which point you can name new beneficiaries for any remaining contributions and interest owed to you. Just be aware that if you name a younger person, not your spouse, as your beneficiary, there may be IRS limitations that come into play, especially with option 4 and 4A. 

Now let's review the strategy for Joint and Survivor Annuity Fixed, which includes option 3. Option 3 is unique because it allows for two primary beneficiaries who will each receive 50 % of your reduced benefit for their lives after you pass. Requirements. You must name exactly two primary beneficiaries and both must be people. Permanence. This decision is more permanent than the pop-up option we just discussed. There is no pop-up if one of your two beneficiaries die. Your benefit stays the same during your retirement and the surviving beneficiary's share would increase to 100%. Option three is often used by retirees with two dependents depending on your income, like a spouse, an adult, special needs child. It's probably the second easiest option to name beneficiaries but ensure that both individuals truly need that long-term lifetime income protection. This isn't an option you would choose beneficiaries with a charitable mindset like two self-sufficient adult children. And be aware of IRS limits on younger, non-spouse beneficiaries. 

Now let's review the strategy for single life annuity with guaranteed period for 10, 15, or 20 years, which includes option 4B. If you die before that period ends, your beneficiaries get your same retirement benefits the remainder of the guaranteed period. Flexibility. You can name one or more primary beneficiaries. Who can be named? A person, trust, estate, or charity. Changes. You can change these beneficiaries at any time. If you have someone depending on your income for a specific window of time, they should be your primary beneficiary for this option. Like a child in high school or a spouse waiting to draw against their social security or 401k balance. However, if you do name a non-spouse beneficiary, like a child, who is much younger, IRS required minimum distribution rules may limit the length of the guarantee period you can select. 

Finally, let's review the strategy for single life annuities, which include the max option and option one. These two options provide the highest monthly check, but no ongoing survivor pension. Beneficiaries only receive a lump sum of your remaining unpaid contributions and interest. Who can be named? Multiple people, trusts, or charities. Changes can be made at any time. Unlike the survivor options we discussed earlier, there are no restrictions here. You can name one person, five people, a family trust, or your favorite charity. Because there are no ongoing monthly survivor benefits, only a refund of your remaining contributions and interest the options are almost endless. If your life situation changes, you can update your beneficiaries at any time. This is also where the pop-down provision lives. If you retire under the max option and then get married later, PERS allows you to pop down to a survivor option to protect your new spouse. 

My strategic advice here is to think in layers. Consider naming a spouse first as beneficiary, children second, grandchildren third, and charities fourth.  It's all about creating a clear line of succession for your remaining account balance. While you can name a trust, since this is a one-time refund, not a lifetime pension, the legal cost to set up and maintain a trust specifically for this PERS refund might not be worth the trouble unless it's part of a much larger estate plan. 

How your beneficiary receives the money determines how Uncle Sam taxes it. While Mississippi is incredibly retiree friendly and does not tax this income, your beneficiary will still owe federal income taxes. If they receive a large lump sum from option one or the max option, it could push them into a higher federal tax bracket. For those beneficiaries receiving a lump sum, rolling those funds over into an inherited IRA can be a powerful strategy to defer taxes and avoid a potentially massive one-year tax bill if they have other ordinary income. For specific tax and inheritance planning, refer to the IRS Publication 590B and consult a tax and or finance professional.

What happens if your primary beneficiary passes away and you never name a secondary or update your primary beneficiary? Under Mississippi law, if no valid beneficiary is living at the time of your death, any remaining money in your account is paid to your estate. This means the money must go through probate court, which can take months and cost thousands in legal fees before your family ever sees a dime. This is a PSA to keep your Form 1B updated.

Here are your action items for today. One, review your current beneficiary. Check your PERS service un-audited estimate of benefits or your annual PERS statement to see who is on file. Two, gather SSNs and DOBs. You'll need a social security number and date of birth for any new beneficiary you name. Three, file form 1C or 1B. If you've had a life change such as a marriage, divorce, or death in the family, or you need to update your primary and or secondary beneficiary, submit your updates immediately to PERS on Forms 1C and or Form 1B.

I hope this video helps you navigate the important decision of naming your PERS beneficiary. In our next video, we'll explore how Mississippi PERS retirement benefits are taxed. Please make sure you subscribe so you don't miss this and other videos in our new retirement series. If you found this video helpful, you can thank me by hitting the thumbs up button and sharing it with other PERS members. If you have a follow up question about PERS or anything else related to personal finance, please visit our website at perspro.ms click YouTube and submit your question or topic for a future episode. And finally, if you are looking for a financial planner that specializes in helping PERS members plan for retirement, including deciding who should be named as your beneficiary, please visit our website at perspro.ms to learn more about our firm and to schedule your initial consultation. Thank you for your valuable public service to the state of Mississippi. We'll see you next time.

Disclaimer, this video is for educational and informational purposes only. Neither the host nor this YouTube channel are officially affiliated with, endorsed by, or sponsored by the Public Employees Retirement System of Mississippi. Always consult a qualified professional for personal advice specific to your situation.