| Read Time: 4 minutes | Estate Planning
retirement account rules for estate planning

Retirement accounts are there to provide you with income and financial freedom. While the money is yours, what you can and cannot do with that money is regulated by state and federal tax laws. It is imperative for anyone new to retirement accounts, and those with active accounts, to understand these laws. Failure to comply could result in penalties or fines by the Internal Revenue Service (IRS).

Regulatory guidelines change frequently; therefore, you should keep up-to-date or consult with an attorney and accountant at least once per year to ensure your retirement plan is still compliant.

Contact the Law Office of Andrew M. Lamkin P.C. today.

What Rules Should You Know for Plainview, NY Retirement Accounts?

You have numerous rules to follow when it comes to retirement planning or even taking money from your retirement. Because you worked so hard to earn that money, make sure you keep as much of it as you can and without any headaches by following these key rules:

Cash Out Rules Apply

Some plans have a qualified provision that lets you distribute a vested balance if that amount is less than $5,000 – known as an involuntary cash out. In 2005, the rules changed regarding these cash outs. The new rules require that a plan administrator rolls over your involuntary cash-out amount anywhere from $1,000 to $5,000. That means that they cannot distribute amounts inside that range to you, but instead must roll it over into a Traditional IRA. If you are non-responsive after being removed from the company, then the sponsoring company can use an involuntary cash out without your consent.

Therefore, if you do not proceed cautiously, or if you lose your job, your plan could be rolled over into a participating IRA that is not of your choosing.

Plan for Taxes for Beneficiaries

When you create an estate plan, you will designate a beneficiary for your retirement accounts. Realize that the person receiving your retirement balances could be subject to taxation, because retirement accounts are treated the same as other assets. And because retirement accounts are income from the deceased – like all income there are taxes applied.

If the plan is a Roth IRA, however, there may not be the same taxation applied.

Choose Beneficiaries Wisely

When picking a beneficiary for your retirement accounts, be cautious. While most people will name their spouse or children, other times it is best to consider how your estate will be handled upon your death. Will your estate go through probate or does the bulk of your estate go through a trust?

Also, make sure that the designation forms you fill out with your retirement account match the designations in your estate planning forms. Otherwise, your loved ones may have to deal with months in court fighting for which party should receive your retirement funds.

Never Automatically Assign a Retirement Account to a Trust

To avoid probate, you might be tempted to name your trust as the beneficiary of your retirement funds. However, it is highly advised that you consult with an attorney before doing so. You and your attorney must weigh the time and cost of creating a qualified trust versus the costs of allowing the retirement account to pass over without one. Also, consider the amount that your loved one would receive in a payout.

For example, a 401(k) and IRA requires one lump sum distribution upon your death. Therefore, you could not make smaller payments to your loved one to minimize the tax burden – and the same thing happens if you assigned your loved one as the beneficiary of the trust.

Consider Leaving Retirement to Charity

If you already planned on leaving some of your estate to charity, consider doing so with retirement funds instead. These assets could escape the income and estate tax too, with proper planning.

Remember That RMDs Often Apply

In most cases, your beneficiaries will be required to take an RMD, which is a required minimum distribution. These are the amounts that the United States government requires for a person to withdraw each year from an IRA or employer-created retirement plan upon the death of the account holder.

Your loved ones should prepare for these RMDs ahead of time. That way they are not accidentally bumped into a higher tax bracket or losing a large portion of their inheritance to income tax. If your loved ones do not accept their RMD, they could face harsher penalties too.

Do Not Forget the Special Rules for Bonds

Savings bonds are especially difficult when it comes to estate planning. If your savings bond names only you as the owner, then your bond is part of your estate. Therefore, it may be subject to probate. According to the new rules outlined by the U.S. Treasury Department, all savings bonds that are more than $100,000 in value must go through probate. However, most estates with sizeable bonds would go through probate regardless, because it is likely they will have assets of equal value – if not more.

On your savings bonds you can create survivor’s options. This is an option for the beneficiary of the bond to sell the bond back if the owner of the bond passes away or becomes legally incapacitated. Only the designated beneficiary in the survivor option can sell back the bond.

Savings bonds are still taxable. Therefore, an owner may pay income taxes on their bonds interest each year or defer tax payments until the bonds are redeemed. Most people defer. Therefore, if you were to leave a bond to a loved one, the accrued interest on the bond and income must be taxed and satisfied before the remaining balance of that bond is given to the beneficiary.

Furthermore, the interest and income earned from that bond may increase your estate value; thus, making your estate subject to estate tax. If your estate ends with more than $5.25 million or more in assets, including savings bonds, then it will be subject to estate tax.

Confused about Retirement Accounts and Estate Planning?

Figuring out the laws when it comes to your retirement accounts and estate plans is not easy. Not only do you have state regulations, but tax laws and federal rules for some retirement accounts. Therefore, it is best that you consult with an estate planning attorney any time you are drafting a will or thinking about naming your trust as the beneficiary to your retirement funds.

To explore your options for hassle-free retirement and estate planning, speak with the Law Office of Andrew M. Lamkin, P.C. today. Schedule your free case evaluation at 516-605-0625 or request more information online.

Author Photo

Andrew Lamkin is principal in the law firm of Andrew M. Lamkin, P.C., where he focuses his practice in the areas of elder law, estate planning and special needs planning, including Wills and Trusts, Medicaid planning, estate administration and residential real estate transactions. He is admitted to practice law in New York and New Jersey.

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