Many hard-working people look forward to the day they can retire, especially if they have invested and saved for a comfortable retirement. You might not have thousands of dollars in a savings account, but if you have well-funded IRAs or 401ks and a fully vested pension, you will be sitting pretty when it’s finally time to walk away from the 9 to 5.
In the best-case scenario, you hit retirement age and start living the easy life. But unfortunately, that doesn’t happen for everyone. When you are doing your Estate Plan, it’s important to consider the possibility that you could die before you retire. If that happens, how do you make sure that your heirs get as much of that retirement money as possible? When you work with an experienced Estate Planning Attorney, you can be sure every possibility will be covered in your plan.
When Your Spouse Inherits Your Retirement Funds
IRA and 401k accounts allow you to name a beneficiary to receive the funds in the event of your death. The first step in any Estate Plan is to make sure you have done this for all of your retirement accounts, life insurance policies, and other benefits. If you are married and have named your spouse as your beneficiary, the money will pass to them upon your death without going through Probate. Depending on your spouse’s age and financial circumstances, they could roll the money over into their own retirement account or take the money with no penalty.
Most pension plans have some kind of survivor benefit, but it usually only applies to a spouse and minor children. You will have to look at the terms of your specific pension plan to find out if there are benefits for survivors. In most cases, your spouse will get a percentage of the pension, but if you do not have a surviving spouse, your adult children will get nothing.
Non-Spouse Beneficiaries of Retirement Accounts
Thanks to the SECURE Act of 2020, your children could suffer significant income tax consequences if they are the beneficiaries of your IRA or 401k. Beneficiary children cannot roll the account over into their own retirement account, but they could create an inherited IRA to allow the funds to continue to grow tax-deferred. However they choose to handle the funds, they must withdraw the entire amount within ten years of your death.
This might not be a problem if your children are college students or young adults and aren’t earning much of a salary on their own. However, if they are earning income and have to withdraw additional money from the retirement account, that could put them in a higher tax bracket and cost them a significant amount in income tax. For example, if your IRA is worth a million dollars and you have one daughter, she will have to withdraw $100,000 a year for ten years. Great for her if she needs the money, but not so great if she doesn’t need it, and it increases her tax burden.
One way you could reduce the tax burden on your heirs is to add more beneficiaries to spread the money out more widely. If you have grandchildren, they could be named as direct beneficiaries, and they would not have to pay income tax at all. Your Estate Planning Attorney can discuss other options with you.
What if You Have Already Retired?
Once you retire and have access to your retirement savings, you could move the money into a Revocable Living Trust with your heirs named as beneficiaries. If possible, it is also a good idea to take your pension as a lump sum and put that money in the Trust as well. That way, the money you earned over your working years can benefit your heirs. If you take your pension as a monthly benefit, the payouts will stop with your death, and your children will not benefit.
Are You Looking for an Estate Planning Attorney in Texarkana, TX?
If you are looking for Estate Planning advice, you need to speak with an experienced Estate Planning attorney as soon as possible. Contact us online or call our Texarkana office directly at 903.223.5653. We also have offices in Tyler, Paris, and Longview, as well as Magnolia, AR!
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