Estate Planning for Retirement Assets in a Nutshell

When the owner of an IRA or 401(k) plan dies, the plan must pay out over some period of time. This is true regardless of whether the IRA/401(k) is a traditional account or a Roth account. The only exception is when the surviving spouse is named a beneficiary. In that case, the surviving spouse has the option of rolling over the decedent’s account to his or her own account.

Amounts distributed from a retirement plan–excluding Roth distributions–generally constitute taxable income to the recipient. From an income tax standpoint, the best result is to “stretch out” payments for as long as possible. This is desirable even with a Roth account, because amounts remaining in the account continue to grow tax-free.

The tax rules do not make it easy to achieve stretch out unless the beneficiary is an individual. However, under certain circumstances, naming an individual as beneficiary is undesirable. The beneficiary may have issues with creditors, taxes, or his or her own family. Perhaps the beneficiary has a poor financial track record or is unable to manage assets due to disability. Whatever the case, the goal is to preserve stretch out while addressing non-tax estate planning concerns.

Posted by Joel D. Roettger, JD, LLM, EPLS

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