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About Inherited Retirement Accounts

Nashville Blog 2017 October About Inherited Retirement Accounts
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About Inherited Retirement Accounts

Posted By David Whittaker, Attorney at Law || 11-Oct-2017

Most of my clients have a 401(k), an IRA or a pension; therefore, I always account for such accounts when I’m helping them create a sound estate plan. If you have one or more retirement accounts, surly you want to know if your beneficiaries will have to pay taxes on them. Read on as I answer your questions.

1. Do beneficiaries pay taxes on inherited retirement accounts?

Most of the time, yes. Other assets, such as real estate, automobiles, life insurance and other non-retirement accounts are not considered “taxable income” when they’re inherited. However, retirement accounts are considered as income of the decedent. If income is withdrawn from a non-Roth account, the beneficiary will be taxed at his or her normal income tax rate.

2. Are all retirement accounts created equal?

No, they are not created equal, nor are they treated the same. For example, if a beneficiary inherits a 401(k) plan, he or she will likely be subject to more limitations than beneficiaries who receive IRAs. Also, beneficiaries are required to withdraw funds from employer-sponsored plans within five years of the decedent’s passing, even if the beneficiary doesn’t want to. Beneficiary withdrawals are counted as taxable income.

In contrast, IRAS are more flexible. If the beneficiary wants, he or she can stretch it out over their life; this allows tax-deferred growth and it reduces their immediate tax liability. However, most employer-sponsored 401(k) plans actually require that the funds be put into an IRA when the owner of the account passes away. Thus, those accounts can be “stretched out.”

3. Who should I choose to be my beneficiary?

Most of the time people designate their husband or wife as the primary beneficiary and they name their children as contingent beneficiaries. This allows the accounts to pass outside of probate, but it does not protect the funds in these accounts. While making beneficiary designations for retirement accounts, make sure they align with your overall estate planning goals. The alternative? It may make more sense for you to leave your retirement accounts to a trust, which can allow for ongoing benefits to your beneficiaries instead of distributing a lump sum upon your death.

Looking for a Nashville estate planning and probate attorney? Contact me today.

Categories: Inheritance, Probate, Trusts, Beneficiary Designations, Estate Planning, Retirement Accounts

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David Whittaker, Attorney at Law

Call Today: (888) 492-4735

David Whittaker, Attorney at Law - Nashville Probate Attorney
1616 Westgate Circle, Suite 127, Brentwood, TN 37027 View Map
Call Today: (888) 492-4735
(615) 289-6284
Website: http://www.attorneydavidwhittaker.com/
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