Many Americans make this 1 mistake with their 401(k)s and IRAs. Here's how to avoid leaving a headache for your heirs

For example, spouses have to waive their rights to a 401(k) even in the presence of a beneficiary designation, so if your situation is complicated, it’s best to make plans with the help of a professional money manager.

Once an account holder dies, beneficiary forms are final. Even court orders or family agreements rarely override them. Per the agreement you signed with your financial institution, they are legally obligated to pay the listed person, not whoever is named in the will.

Unlike wills or trusts, which can be contested or amended, beneficiary designations are essentially carved in stone.

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How to protect your beneficiaries from expensive errors

The costs of not getting your beneficiaries right on your IRA or 401(k) are high. A single error in naming or maintaining beneficiaries can lead to tax penalties, family disputes and lost inheritances.

If no beneficiary is named, the rules that govern the plan will revert to a default order: usually the spouse first, then children, parents, and the estate, in that order.

For example, if a person is separated but not divorced, and they leave their estate to their children, the surviving spouse will still get the retirement account.

To avoid these problems, keep your account beneficiaries up to date through these steps:

Review your beneficiary forms every two to three years

Update your financial plan whenever there is a big life event, like a marriage, the birth of a child, the birth of grandchildren, or a divorce.

Even when things are cruising on autopilot, it’s good to revisit your documents before each new presidential election.

Name your primary and secondary beneficiaries

Will your account go primarily to your spouse, and then to your children if they have already passed? Or do you want some money to go to the spouse and some to the children immediately? Don’t let your accounts follow the preordained pecking order if you have other wishes.

Be aware of the tax implications for your heirs

A spouse may be able to roll your account into their own and so avoid RMDs and a big tax hit. But non-spouse heirs may have to take RMDs sooner, which could bump them into a higher tax bracket. Be sure you discuss your plans with your heirs so they can be aware of these issues.

Keep copies of forms and confirm with each plan provider

If you transfer custody or roll over an account, you will likely have to update the form as old beneficiary designations may not carry over automatically.

If you take time now to review and update your forms, name heirs and understand the rules around spousal rights and tax implications, your heirs will thank you.