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Retirement Accounts and Estate Planning: Best Practices for Beneficiaries

Loune-Djenia Askew, Esq.

Jun 24, 2024

Here are some best practices for designating beneficiaries for your retirement accounts.

Retirement accounts are often one of the most significant assets individuals will manage. Learning how to effectively include these accounts in your estate plan can guarantee that your financial legacy is managed just as you want. Here are some best practices for designating beneficiaries for your retirement accounts.

Understand the Importance of Beneficiary Designations

Retirement accounts such as IRAs, 401(k)s, and other pension plans do not pass through your will; instead, they are transferred directly to the beneficiaries named in the account documents. Therefore, the person or people you name as beneficiaries will inherit these assets regardless of the instructions in your will. This makes updating and choosing the right beneficiaries extremely important.

Choosing Your Beneficiaries

Primary and Contingent Beneficiaries are the first in line to inherit the account, while the contingent beneficiary will inherit if the primary is unable to do so. Naming minors as beneficiaries can complicate matters, as they cannot directly control inherited retirement accounts until they reach adulthood. If you wish to name a minor, consider setting up a trust or naming a custodian who can manage the funds until the child comes of age.

In many cases, spouses are the primary beneficiaries for retirement accounts. However, there are specific rules, especially concerning taxes and required minimum distributions (RMDs), which may influence the decision to name a spouse as a beneficiary.

The Impact of Taxes

Beneficiaries of retirement accounts typically have several options on how to receive the assets, which can have different tax implications. For example, they may choose to take a lump sum, which could push them into a higher tax bracket, or opt for distributions over time, which might be more tax-efficient.

Consider Roth Conversions

Converting a traditional IRA to a Roth IRA during your lifetime can be a strategic move, as it allows the beneficiaries to inherit the funds tax-free. However, this requires paying taxes on the conversion, so it’s important to analyze whether this makes financial sense given your current and projected future tax situations.

Remember, an informed approach to designating beneficiaries will help protect your assets and fulfill your estate planning objectives.

For more information, contact our office at Askew & Associates, P.A. by calling 954-546-2699.

Disclaimer: this blog post is not intended to be legal advice. We highly recommend speaking to an attorney if you have any legal concerns.

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