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Don’t Forget About Your IRA When Planning Your Estate

IRAs (as well as other tax-deferred investments such as 401(k) and 403(b) plans) are great investment tools because they permit you to defer taxes until the funds are withdrawn. IRA’s are designed to encourage and support saving for retirement. This is why you are required to begin withdrawing money from the accounts after you reach age 72. Presumably, when you withdraw the funds during retirement, you will be in a lower tax bracket than you were when you were depositing funds.

If you withdraw all your retirement funds during your life, IRAs and their brethren are not too complicated. But since you never have to withdraw everything, most estate include IRA, which can make things a bit complicated. In addition, what was always complicated, got more so with passage of the SECURE Act at the end of 2019.

Here’s a short primer on planing for your retirement accounts.

Check Your Beneficiary Designations

Make sure whoever you name as beneficiary of your IRAs is who you want. Sometimes people’s circumstances change and who they named years ago is not who they would want to inherit now. In addition, beneficiary designations can be lost. Make sure you have a copy of yours located in a place where it can be easily found when necessary.

Understand Inherited IRA Rules

The SECURE Act changed the rules for the timing of withdrawals from inherited IRAs to limit so-called “stretch” IRAs. Under the old rules, if you inherited an IRA your minimum distributions — the portion of the IRA you must withdraw each year — was based on your life expectancy. This meant that younger people who inherited IRAs could maintain the tax deferral for decades, withdrawing and paying taxes on only a small amount each year. The SECURE Act ended that for all but a small group of beneficiaries. The following can still use their own life expectancies in determining their minimum distributions each year:

  • Surviving spouses (who can roll over the inherited IRA into their own IRA).
  • Disabled beneficiaries.
  • Beneficiaries with chronic illnesses.
  • Minors.
  • Any beneficiary who is less than 10 years younger than the deceased IRA owner.

Everyone else must withdraw the funds, and pay the deferred taxes, within 10 years of the owner’s death.

Consider a Trust

Here are some reasons you might want your IRA or other retirement plan to be payable to a trust rather than to go outright to the beneficiary:

  • Estate tax planning. Depending on your level of assets, it may make sense for your IRA to go to a trust rather than outright to your spouse so it won’t be taxable when the second spouse dies. (There’s no estate tax either way when the first spouse dies.)
  • Special needs planning. If you have a child or other beneficiary with special needs, you probably don’t anything to go directly to them.
  • Creditor protection. Funds in a trust you create for the benefit of a third party can be protected in the event they are sued (or get divorced). The bankruptcy law actually provides a lot of protections to your own IRA should you run into legal or financial trouble, but not to an inherited IRA.
  • Minor beneficiaries. You may not want your children or grandchildren to get their hands on the IRA at age 18.
  • Second marriage (or relationship). While you may want your spouse or partner to have the support of your IRA should they need it, you might what’s left to go to your children or family members upon your spouse or partner’s death. You can, for instance, require that the annual minimum distributions go to your spouse or partner, but that what’s left pass when they die go to your family.

Unfortunately, nothing is simple these days. But we have to deal with the complications whether or not we’re happy about it. Let’s not forget our retirement plans when planning for our future and that of our families.

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