Estate Planning Considerations

Taxation of Your Retirement Plan Assets

At your death, if you own retirement plan assets, the assets are included in your estate. That is, your 401(k) plan, IRA, tax-deferred annuities, etc., are included in your estate even if you have not yet received the money. Then when your beneficiary receives the money, he or she will have to pay income tax on the amounts received. Decisions you make while you're still alive can affect how fast the tax bill comes due after your death.

Naming a Beneficiary

If you are married, naming your spouse as the beneficiary of your retirement plan assets provides the most flexibility. This is because a spouse has options that aren't available to other beneficiaries. For spouse beneficiaries, the surviving spouse may 1) roll over the decedent's plan assets into an IRA in his/her own name or into his/her qualified plan, or 2) if the inherited asset is the decedent's IRA, the surviving spouse can elect to treat it as his/her own if he or she is the sole beneficiary of the IRA. The surviving spouse would then use the life expectancy table used by IRA owners. This table contains larger distribution periods than the table used by beneficiaries; hence smaller minimum distributions are required. Minimum distributions would then begin from an IRA upon the surviving spouse's attainment of age 70½, regardless of whether the decedent was already over age 70½ and taking distributions. If the amounts are rolled over into a qualified plan, no distribution is required until the later of age 70½ or retirement age. Your spouse can also choose not to roll over your retirement assets, but instead remain as a beneficiary of your retirement plan account. If your spouse remains as a beneficiary and you die prior to age 70½, he or she doesn't have to start withdrawals until the year when you would have reached age 70½. Funds passing to a surviving spouse qualify for the marital deduction from the federal estate tax.

If someone other than your spouse is named as a beneficiary, and you die before age 70½, they may have three choices for withdrawing the money depending on the provisions of the plan:

  1. withdraw all the funds within five years after your death; or
  2. start withdrawals by the end of the year after your death and spread distributions over the beneficiary's own life expectancy; or
  3. roll over the amount eligible to an inherited IRA and take distributions based on the beneficiaries' life expectancy or five years depending on the time of the rollover.

IMPORTANT NOTE: If you fail to name a beneficiary, and die prior to age 70½, and the retirement plan money passes through your estate to your heirs, all funds must be distributed to your heirs—and income taxes paid—within five years of your death.

If someone other than your spouse is named as a beneficiary, and you die after age 70½, the assets may be distributed over the beneficiary's life expectancy, unless the beneficiary elects to use the five-year rule.

IMPORTANT NOTE: Most of the choices you need to make when dealing with retirement plan benefits at death require expert help. Call your financial professional when addressing these issues.

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