estate planning
Photo: istockphoto

Retirement accounts like 401(k)s, IRAs, and other tax-deferred accounts are an important part of many people’s estate plans. These accounts allow you to save and invest money for retirement in a tax-advantaged way. However, proper estate planning is crucial to ensure your retirement assets are passed on to your beneficiaries in the most efficient manner.

When creating an estate plan for retirement accounts, one of the first steps is to name beneficiaries for each account. This is important because retirement accounts do not pass through a will – they go directly to the named beneficiaries. Carefully choose both primary and contingent beneficiaries to cover any circumstances.

It is also wise to consider creating a trust as the beneficiary of a retirement account. This provides more control over how and when the assets are distributed. A trust can protect the funds from a beneficiary’s creditors, divorce, or irresponsible spending. It can also allow the assets to remain tax deferred longer while still providing income to beneficiaries.

In addition, review who you name as the successor or contingent beneficiary. If the primary beneficiary passes away before you, the assets would pass to the successor you named. You want to choose this wisely to make sure assets go where you intend.

The type of retirement account factors into estate planning as well. Some accounts, like traditional 401(k)s and IRAs, have required minimum distributions (RMDs) that must start at age 70 1/2. Failure to take RMDs results in a stiff penalty from the IRS. Roth accounts do not have RMDs, so may be the better option if you don’t need the income.

When retirement accounts pass to heirs, beneficiaries have options on how they want to take distributions. Non-spouse beneficiaries must take all funds within 10 years of the original owner’s death. For large accounts, this could bump beneficiaries into higher tax brackets. Situations like this warrant advanced planning with a professional.

Tax implications must also be examined when planning for retirement assets. Withdrawing funds from tax-deferred accounts may subject beneficiaries to higher income taxes. Techniques like disclaiming, qualified charitable distributions, and accumulated lifetime trusts could reduce tax liability. Again, these choices underscore the importance of advanced planning when estates include substantial retirement assets.

Here are some frequently asked questions about estate planning for retirement accounts:

What happens if I don’t name a beneficiary for an account?

If you do not designate beneficiaries for your retirement accounts, the assets may end up being paid to your estate when you pass away. This could necessitate probate, create unnecessary tax consequences, and prevent the funds from going directly to your intended heirs.

How often should I update beneficiaries?

You should review and update beneficiaries regularly, at least once per year. After major life events like marriage, divorce, birth of children, or death of a beneficiary, be sure to revisit your designations. Keeping them current helps ensure account assets go to the right people.

Can I name a minor child as beneficiary?

Yes, but the account will become tied up in court guardianship until the child reaches age 18 or 21. To avoid this, name a custodian to manage the minor’s benefits from the account. Or, set up a trust for the child’s benefit.

What happens to retirement accounts if I’m unmarried with no children?

If single with no descendents, you can still name beneficiaries like other relatives, friends, or charities. Without beneficiaries, the accounts pass to your estate which must go through probate.

How do taxes factor into inheriting an IRA?

Beneficiaries must pay income taxes on withdrawals from inherited IRAs, 401(k)s, etc. Spouses can roll over an inherited IRA into their own account to defer taxes longer. Non-spouse heirs must empty the account within 10 years, paying tax on distributions.

Properly structuring retirement benefits is a key part of many estate plans. Putting the right beneficiaries in place and working with financial and legal professionals can help you ensure your assets transfer smoothly, maintain their tax-deferred status, and provide income to your heirs in the manner you intend. With some guidance and proactive planning, you can feel confident your retirement accounts will further the financial and legacy goals of your estate.


Please enter your comment!
Please enter your name here