If you’re confused about exactly how a power of attorney works, you’re not alone. Much of the confusion stems from the several different kinds of POAs out there. Here’s a summary and how a POA might work with your retirement plans.
What Is a Power of Attorney
The simplest explanation is that a power of attorney is a document that gives someone — called the agent or attorney-in-fact — one or more authorities to act on behalf of someone else.
The person granting this authority under the POA is called the principal.
Powers of attorney can allow an agent to act in certain situations regarding the principal’s health care, or they may authorize him to make financial transactions on the principal’s behalf. They can be “durable” — they go into effect immediately and continue in effect if the principal becomes incapacitated. Or they may be “springing.” They do not go into effect unless and until the principal becomes incapacitated.
Powers of Attorney and Your Retirement Plans
Many people have accumulated a significant amount of wealth in 401(k)s, IRAs and annuities. But the reality is that if you become mentally incapacitated and lose the ability to manage your finances, your loved ones won’t be able to access these assets unless one or more of them have power of attorney.
To make matters worse, even if you do have a financial POA in place, chances are that it may not contain the appropriate language to allow your attorney-in-fact to manage your 401(k)s, IRAs and annuities if it’s more than a few years old.