When most people think about planning their estate, they focus on things like the money in their bank accounts, their home, other property and their most important possessions. But a good estate planning lawyer will be sure to ask about all of your assets — including your retirement accounts. 

Although accounts like 401(k)s and IRAs have you designate beneficiaries when you set them up, you still need to look into the finer details of how your retirement plans will be incorporated into your estate plan. You want to be certain that everything with your assets, including all retirement accounts, will be distributed as you intend and in ways that offer maximum benefit for your beneficiaries. 

Retirement Plans in Estate Planning — The Basics

Retirement accounts can be some of the more complicated assets to manage in an estate plan. Different types of accounts may have different rules for how they should be managed and distributed — and the tax concerns for each type of account may differ substantially, so you want to be careful with how you weave them into your overall plan. 

Retirement Plans Generally Avoid Probate

You want to keep things as simple as possible — both to minimize confusion and to maximize the amount of money your beneficiaries receive. One of the nice things about most retirement accounts is that they allow you to pass on your benefits to your beneficiaries without the need for probate. Probate is often a long, tedious, expensive legal process, which is why estate planning attorneys do their best to help clients avoid probate if at all possible. 

It is important to remember that avoiding probate is achieved by naming beneficiaries on your retirement accounts. You may have set up your retirement account decades ago, so it might be a good idea to check and verify who the beneficiaries are for each account so that they go where you want them to go. 

The designated beneficiaries on your retirement accounts will win out over the instructions in a will, so be certain the ones named on your accounts are the ones you intend to pass your accounts to. 

If you have not named beneficiaries on an account or if the beneficiaries you named have passed away, the account will have to pass through probate. 

Learn How Taxes Will Affect Your Accounts

Unfortunately, probate is not the only risk to your retirement accounts in the estate planning process. Taxes are a major concern — which is one of the reasons why it can be helpful to speak with an estate planning attorney. Some tax issues are relatively easy to understand while others are quite complicated. The IRS regularly updates dense books on retirement tax rules, making them hard to keep track of and understand without proper training. That being said, some basic concepts can be useful to know, including:

  • Naming your spouse as beneficiary is usually best. In many instances, your spouse can keep all the money in the IRA or 401(k) in its tax-deferred state — and wait to withdraw it at age 70 ½ to achieve maximum tax benefits. Other beneficiaries will not typically have this advantage and are therefore likely to lose more through taxation. 
  • Leaving your benefits to a beneficiary in a lower tax bracket is a good idea. When a beneficiary has to start taking their required minimum distribution (RMD) payouts, those payouts will be taxed as income at the beneficiary’s current income tax bracket. So, giving your traditional IRA account to a beneficiary in a lower tax bracket will result in that beneficiary getting more of the money than if you gave it to someone in a higher income tax bracket. 
  • Your beneficiary may be able to take a deduction for the federal tax they pay on the account. If your beneficiary pays federal estate tax on the account, they should be able to take an income tax deduction for that tax — which can help them lower their tax burden when they withdraw the money from the account. 

Take Advantage of an Estate Planning Attorney for Your Retirement Accounts

You have worked hard to consistently put money in your retirement accounts. If something happens unexpectedly and you are not able to withdraw your money for your benefit, that money should go to those most important to you. 

At Atlanta Wills + Trusts Law Group by Refeca Law LLC, we are committed to helping you get as much of your estate to your beneficiaries as possible. Please contact us to learn more about what we can do to help with the planning of your estate. 

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