Passing on a Retirement Account

If you have a substantial amount of your retirement savings in a taxable 401(k), IRA, or similar account, know that the rules for passing it down have changed – and it could mean a potentially increased tax burden for your heirs.

Without careful planning, taxes can eat away at what you pass onto your loved one. The recently passed SECURE Act has important implications for retirement planning.

If you want to pass on a retirement account, you need to name beneficiaries. There are a few items you need to consider:

• Even if you have a will or trust, you need to designate a beneficiary for your retirement account.
• If you named a beneficiary years ago, you may need to update it if you have had a major life change, i.e. a marriage, a divorce, a birth, or a death. For example, you may want to divide your IRA equally among your children, but only have the oldest one actually named as a beneficiary because you forgot to make updates.
• For 401(k)s, the automatic designation is usually the spouse of the account owner.

The recently passed SECURE Act has significant effects on estate planning. The SECURE Act eliminated the ‘stretch IRA,’ an estate planning strategy that allowed heirs to stretch out distributions over their lifetime. Now, most beneficiaries will have to drain the account within 10 years.* Consider your beneficiaries’ individual tax burdens, and how each of your assets can be taxed.

Potential tax-efficient strategies:

• A partial or full Roth conversion can potentially help minimize taxes for heirs.
• Proceeds from life insurance can potentially be received income tax-free if policies are structured correctly.

Estate planning isn’t just for billionaires and can be quite complicated, even for the average person. The rules recently changed with the SECURE Act, and your personal situation may have changed since you last designated retirement account beneficiaries and looked at your will. It is never too early to start planning for your future and your loved ones. So, make sure you are doing everything you can now to better prepare for the future.

*The 10-year rule does not apply to the following five beneficiaries: a spouse, a minor child of the deceased, someone less than 10 years younger than you, a qualifying chronically ill heir, or a disabled child.