Many estate plans include strategies to reduce estate taxes and transfer wealth to beneficiaries with the least tax burden possible. But what happens to the funds in retirement accounts when the account holder passes away? Retirements funds often represent the bulk of an individual’s liquid assets, so it’s natural that 401(k)s and IRAs can make significant differences to your estate planning.
Retirement accounts like 401(k)s and IRAs (other than Roth IRAs) are tax-deferred accounts. This, of course, means that the account holder contributes pre-tax dollars to the account. Taxes are then paid on withdrawals from the accounts, whether the account holder or a beneficiary withdrew the funds.
Like many other financial accounts, 401(k)s and IRAs may pass to designated beneficiaries without becoming part of the account holder’s probate estate.
When your spouse inherits your retirement funds, he/she can leave the money in the account or roll it over into their own. Surviving spouses under age 70 ½ do not have to take required minimum distributions (RMDs) on the inherited funds.
Non-spouse beneficiaries, though, may be required to start taking RMDs immediately depending on the plan provider’s rules.
When preparing your estate plans, discuss your retirement accounts with your lawyer. Some beneficiaries may be faced with unique challenges when inheriting the accounts. Adjustments to other bequests may be necessary to even out inheritances and to help beneficiaries deal with those challenges.
For example, you may be able to transfer funds into a rollover IRA that gives your heirs more flexibility. Fees and penalties may apply at the time you move the funds.
It may be better to leave retirement funds to younger members of the family. They’ll probably benefit from an extended distribution period. Also, if you have charitable intent, it may be better to leave qualified retirement funds to the charity because, unlike individual beneficiaries, a charity will not have to pay income tax on a distribution.
The worst thing you can do is ignore estate planning issues or fail to keep your beneficiary designations updated.
At Law Offices of John Mangan, P.A., we help clients build a solid plan for their estates, one that fits their circumstances. Please contact us to schedule an appointment or fill out our Contact Form. We are located in Palm City, Florida, and serve clients in the surrounding communities of Stuart, Hobe Sound, Port St. Lucie, and Jupiter.
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Written by: John Mangan, JD, MBA