By Jeffery J. McKenna
Retirement accounts such as IRAs, Keoghs, 401(k)s and 403(b)s present special estate planning concerns.
Many tax issues must be addressed when planning for the lifetime distribution of retirement accounts to an owner as well as the balances remaining upon an account owner’s death. The IRS has provided many rules and guidelines related to these retirement accounts both during an owner’s life and upon his or her death.
Specifically, proceeds from traditional retirement accounts (generally retirement accounts other than Roth IRAs) are subject to income tax the year they are received. Therefore, account owners, and those who may inherit accounts, generally want to keep distributions to a minimum to reduce taxes provided there is not an immediate need for the assets.
Many account owners reach retirement and find they do not need the assets in their retirement accounts to supplement their retirement. For many of these individuals, their desire is to defer the distribution of these proceeds and allow the assets to continue to grow tax deferred.
Based on the current law, an individual can defer taking proceeds out of most retirement accounts only up to age 72 (there is no mandatory withdrawal for Roth IRAs). However, at age 72, an individual must begin taking his or her required minimum distributions.
These required minimum distributions are based on the life expectancy of the owner as well as the named beneficiary. The required minimum distribution rules allow the account owner to combine his or her life expectancy with the named beneficiary’s life expectancy.
Often, if an individual is married, the spouse is the best choice for the beneficiary. If a spouse is named as beneficiary, the spouse can convert the retirement account to his or her own IRA. This allows the spouse to continue to defer distribution of the proceeds based on the spouse’s life expectancy.
However, in situations of very large estates where the spouse would have sufficient assets without the retirement account, the children or grandchildren may be the best beneficiary choice.
Additionally, owners of qualified retirement accounts that desire to leave an inheritance to one or more charitable institutions, should use retirement funds to make the charitable bequest(s). Because these funds would be subject to income taxes if inherited by children or grandchildren, the retirement accounts should be the source of funds used for charitable giving because the charities will pay NO tax.
These are just a few of the issues related to retirement accounts within an individual’s estate plan. It is very important to review decisions regarding retirement accounts when doing your estate planning.
Jeffery J. McKenna is a local attorney serving clients in Nevada, Arizona and Utah. He is a shareholder at the law firm of Barney McKenna & Olmstead, PC, with offices in Mesquite and St. George. If you have questions you would like addressed in these articles, you can contact him at (435) 628-1711 or email@example.com.