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Estate planning via retirement assets

In 1978 the federal government began to allow employees to save pre-tax earnings in a variety of retirement accounts. The accounts would then grow untaxed until they were withdrawn starting at mandatory age 70 and a half. (The age now for Required Minimum Distributions “RMD” is 72 years old). Many of you, myself included, have some sort of retirement fund whether it is a 401k, 403b, IRA or 457 plan.


One of the nice features of these plans is that they allow the owner to name a beneficiary upon his or her death. In so doing, the owner is able to by-pass the cost, delay and hassle of probate court. Your family doesn’t have to probate your Will through court if all you own is a 401k that names your two kids.


Until recently, upon the owner’s death, the beneficiary was then able to “roll over” the account into his or her own name and would be able to “stretch” the required distributions over his or her life expectancy. No more. That feature was largely eradicated at the end of 2019 by the SECURE ACT. Certain beneficiaries can still roll over and stretch. They include the surviving spouse, disabled children and minor children and some other class of beneficiaries. What about everyone else, such as your adult children or your non-married life partner? No more roll over and stretch. The funds must be taken out within 10 years starting the year after the death of the owner. No more RMDs. The beneficiary simply must withdraw the funds before the 10 (actually 11) year anniversary.


Why did our government enact this law? Because they want to tax all those dollars that are sitting in your retirement accounts. They want the funds pushed out to the beneficiaries and taxed. Take, for example, a 65 year old widow with $1,200,000 in her 401k. She names her two adult children as beneficiaries. At her death the children each inherit $600,000 of taxable income. They have 11 years to withdraw these funds. Trusts can still be an effective mechanism for managing childrens’ inheritances of retirement funds. Some elders are withdrawing bigger discretionary amounts now, paying the tax and purchasing ROTH IRAs that grow untaxed. If any of this information applies to you, I suggest you consult with an accountant and/or an estate planning attorney.

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