Five Things You Probably Haven’t Done but Should to Integrate Your Retirement Accounts into Your Estate Plan

IntegrationYour retirement accounts, including your 401(k) plans and individual retirement accounts (IRAs), are likely to be your most significant assets along with your home. While you may think you’ll need every bit of money in those accounts for your retirement, what would happen if you die at an early age?

Not fun to think about, but it’s important to plan for all possibilities, just in case. If you don’t, a lot of the money you worked so hard to save in your retirement accounts could be gobbled up by estate taxes. Here are five important ways to make sure your retirement accounts go the right place and as intact as possible after you are gone:

  • Review your beneficiary designations

If you were to pass away unexpectedly, the assets in your retirement accounts would pass to your designated beneficiaries, not the heirs designated in your will or other estate planning documents. When is the last time you checked who is your beneficiaries on your retirement accounts? Can’t remember? That probably means you need to review and possibly update your documents.

Review your beneficiary designations after major life changes, such as marriage, divorce, or a child’s birth.

  • Split an IRA when there are multiple beneficiaries

If you would like the assets in your retirement account to go to more than one non-spouse beneficiary, it often isn’t a good idea to list them all on a single account, because distributions must be taken based on the oldest beneficiary’s life expectancy.  A better option is to split the IRA into separate accounts, so that each beneficiary can take distributions over his/her life expectancy. You can split the account while you are alive or your beneficiary can do so within nine months after your death.

  • Make sure your spouse understands the rules for inheriting an IRA

Most people will designate their spouse as their beneficiary on their retirement account. Make sure your spouse does not roll the balance over to a spousal IRA too quickly after you pass away. Once the balance is rolled over, certain important estate planning opportunities are lost. For instance, spouses under age 59 and a half can make withdrawals from the original IRA without paying a penalty. Once the account is rolled over, withdrawals before age 59 and a half would result in a 10% federal income tax penalty. Also, spouses who are older than the original owner can delay distributions by retaining the IRA. Thus, it is usually best for the surviving spouse to determine his/her financial needs before rolling over the IRA balance.

  • Consider rolling your traditional IRA balances over to a Roth IRA

All taxpayers can now convert from a traditional IRA to a Roth IRA regardless of income levels. (Read: To Roth or not to Roth?) You must pay income taxes on the taxable amount of the conversion, but those taxes can be paid with funds outside the IRA. That preserves the IRA’s value and reduces your taxable estate. Your heirs will then receive qualified distributions free from income taxes, including all future appreciation on the balance.

  • Teach your heirs the benefits of stretching out withdrawals from inherited IRAs

After an IRA is inherited, a traditional deductible IRA still retains its tax-deferred growth and a Roth IRA retains its tax-free growth. Your heirs should extend this growth for as long as possible. If the IRA has a designated beneficiary, which includes individuals and certain trusts, the balance can be paid out over the beneficiary’s life expectancy. Spouses have additional options that can stretch payments out even longer.

For even more great advice for estate planning geared specifically toward women, visit our extensive article archive.

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