Estate Planning with Retirement Accounts

Offices in Fishers and Rockville, serving all surrounding Cities



A common investment strategy is through assets such as Individual Retirement Accounts (commonly referred to as an “IRA”), a company pension plan such as a 401(k), or a retirement plan available to employees of educational institutions and specific non-profit organizations such as a 403(b). The most common concern with such account types is that they are considered to be qualified plans, which means that the individual did not pay taxes on the money when he/she contributed to it. Furthermore, while the money remains invested, it grows tax-deferred, or tax-free, until distributions are later made.

As they say, all good things must come to an end –Uncle Sam will indeed get paid at some point. If the individual draws any income from the plan or if the individual withdraws before they attain the age of 59 ½, there will be income taxes due and sometimes early withdrawal penalties, too. Also, once the individual attains the age of 70 ½, he/she must begin taking their Required Minimum Distribution (commonly referred to as “RMD”) each calendar year, which again is subject to income tax.

At an individual’s passing, the individual’s spouse (if he/she is the named beneficiary) may “roll over” the retirement funds received to a retirement asset of their own. This is often an advantageous option; though, there are a few disadvantages (i.e. like if the spouse has creditors). The “roll over” option, unfortunately, is not an option for non-spouse beneficiaries – so the question often arises, “then what?”

With appropriate provisions incorporated into an estate plan, the most beneficial way to pass on retirement funds is allowing your beneficiary or beneficiaries to “stretch out” their share of the account. “Stretching out” is not a type of IRA or retirement asset; instead, it is a strategy utilized after the owner of the account passes to allow your beneficiaries to receive the proceeds in the most tax-friendly manner. Otherwise, if the beneficiary chooses to outright liquidate their share of the retirement account, Uncle Sam will be very happy with him/her.

If you have an IRA, 401(k), or 403(b) (or other similar tax-deferred retirement accounts), it is critical that your estate planning attorney provide options to you which will allow your beneficiaries to “stretch out” their share of your retirement account once you pass. This is even more important when these type of accounts are a substantial portion of an individual’s estate. Estate planning with retirement assets requires a conversation – and it is a conversation we are willing and able to have with you.