1. Beneficiaries of retirement accounts, such as 401(k) plans and traditional IRAs, will have to pay ordinary income tax on distributions they receive.
2. Inherited assets like bank accounts and real estate are usually passed to beneficiaries income tax free, but this is not the case with retirement accounts.
3. Distributions from pretax 401(k) accounts and traditional IRAs are subject to income tax, while distributions from Roth IRAs and Roth 401(k) accounts may be tax free if all requirements are met.
4. Inequitable inheritance can occur if one beneficiary receives assets subject to income tax, while another receives tax free assets, potentially leading to resentment and estrangement among heirs. 1. When opening an IRA or participating in a 401(k), individuals must name beneficiaries, and they can change these beneficiaries at any time.
2. It is important to designate both primary and secondary beneficiaries for retirement accounts to ensure there are no gaps in who will receive the benefits.
3. It is important to review and update beneficiary designation forms annually, especially when there are changes to accounts, finances, or family circumstances.
4. Naming multiple beneficiaries for retirement accounts requires specifying the percentage that each should receive, ensuring the total equals 100%.
5. If retirement account benefits go to the estate, tax benefits and distribution flexibility may be lost, and it may require probate, resulting in fees and delays.
6. Individuals have various options when planning how their retirement accounts will transfer, including naming individuals, trusts, or charities. 1. Naming a spouse as a beneficiary on retirement accounts provides them with flexibility in accessing funds without penalties for early withdrawals.
2. Non-spouse beneficiaries cannot roll the 401(k) or IRA into their own, but can move the funds into an inherited IRA, subject to the 10-year rule under the SECURE Act.
3. If a trust is named as the beneficiary, special rules apply to ensure the proper distribution of the retirement account and to avoid income tax issues. – If a trust is named as a beneficiary of an IRA and it doesn’t qualify as a see-through trust under IRS rules, the IRA must be distributed under the 5-year rule and any taxes owed will be accelerated.
– If a charity is named as a beneficiary of retirement accounts, the organization wouldn’t receive any of the tax-deferral benefits that individuals or possibly a trust would receive, but they’d receive the immediate benefit of using the funds from the accounts to further their philanthropic missions.
– When developing and reviewing an estate plan, it’s important to ensure all assets and accounts, including retirement accounts, will be distributed according to the intended beneficiaries.
https://www.firstcitizens.com/wealth/insights/estate-planning/things-to-know-about-retirement-account-beneficiaries
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