Connections for Success



Choose the Beneficiary of Your Retirement Plan Carefully

If you have been fortunate enough to live into your golden years without tapping much or any of your retirement savings beyond required minimum distributions (RMDs), you have the opportunity to perhaps share considerable tax-deferred (or, in the case of Roth accounts, tax-free) wealth with a family member on your death. However, it is important to be aware of the income and estate tax risks for both you and the chosen beneficiary of your IRA, 401(k) plan or other retirement account.

For non-Roth accounts, there are three factors to consider that can affect the beneficiary’s income tax liability: 1) How long the beneficiary will be able to defer distributions; 2) how large any RMDs will be; and 3) the beneficiary’s likely income tax bracket.

In most cases, annual RMDs must begin shortly after inheriting a retirement plan. The amount of the RMD depends on the age of your oldest beneficiary and the size of the account. Generally, the younger your beneficiaries are, the better. Why? Because the RMDs will be smaller, allowing more opportunity for continued tax-deferred (or tax-free) growth.

It is also important to consider the estate tax consequences. It may be advantageous to name your spouse as beneficiary because transfers to your spouse are free of estate tax — as long as he or she is a U.S. citizen. As of June 26, 2013 married same-sex couples that are married in a state that recognizes the validity of their union can also make these transfers to their spouses free of estate tax. However, the downside is that the IRA or other plan will increase the size of your spouse’s taxable estate, which may result in increased estate tax liability on his or her death.

If you name a beneficiary other than your spouse, the retirement plan generally will be included in your estate. Whether it will cause any estate tax liability will depend on a variety of factors, such as the size of the plan, the size of your total estate and the estate tax exemption available for the year of your death.

Because life changes as it unfolds, be sure to revisit these documents regularly. If you have experienced any change in your personal situation, please contact your ORBA advisor or Amanda Cenzer at 312.670.7444 to see what, if any changes, you should consider making in order to maximize the tax savings for you and your family.

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