Maximizing Your Retirement Accounts for Your Beneficiaries

Q: How much of my retirement accounts will my heirs get to keep when I die?

If you have a retirement account such as a 401(k) or an IRA, and you have designated a beneficiary for the account without consulting a skilled Minnesota estate planning attorney, your intended beneficiaries may end up inheriting an income tax burden…and significantly less of the total account proceeds than you think.

Advanced estate planning attorneys prepare comprehensive estate plans that take many issues, like tax planning, Medicaid planning, and more, into account in order to maximize asset protection for your benefit during your lifetime and for the financial security of your loved ones after you’re gone.

One of the areas where attorney input is crucial involves designating beneficiaries for IRAs, 401(k)s and other similar retirement accounts. If you didn’t involve an attorney when you set these accounts up, it could literally be a costly mistake down the road.

There are three common mistakes that could cost your intended beneficiaries big future tax dollars if you, like many people, die with large portions of tax-deferred money in these retirement accounts. Fortunately, they can be avoided if your estate planning attorney reviews your particular situation and feels any of these options are best for your particular situation:

  • Don’t name your estate as the account beneficiary. By naming a person instead, the person can usually stretch out and reduce the overall percentage paid in income tax on the bequest over a much longer time frame.
  • Name a trust as the primary or contingent beneficiary of the account. Provided the appropriate language is used, this may also allow the account’s assets to provide a beneficiary with a longer life expectancy more income over time than if the estate was named the beneficiary.
  • When leaving money to charities, designate the bequest come from the IRA or 401(k) accounts because unlike humans the charity, being tax-exempt, can benefit from receiving 100% of the bequest tax-free. Non-retirement accounts and many other assets often tax past tax-free to heirs so taking the charitable bequest from the retirement account is a win-win for both the charity and the heirs. The remaining portion, if any, of the IRA or 401(k) can be left to the heirs still reducing their overall tax burden.

Whether you have a retirement account or not, and whether you need an initial estate plan or just want to modify an existing plan, the Unique Estate Law Firm can help. Contact us today for a free consultation.