Tips for Retirement Accounts and Estate Planning

Retirement accounts and estate planning can be tricky. Generally, retirement savings not spent during retirement will be added to a person's estate when they pass. In order to avoid heavy taxations on estates and retirement accounts after death, it is recommended to keep as much wealth out of one's estate as possible so that the majority of money can go to charities and loved ones.

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Jeffrey Johnson is a legal writer with a focus on personal injury. He has worked on personal injury and sovereign immunity litigation in addition to experience in family, estate, and criminal law. He earned a J.D. from the University of Baltimore and has worked in legal offices and non-profits in Maryland, Texas, and North Carolina. He has also earned an MFA in screenwriting from Chapman Univer...

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UPDATED: Aug 11, 2021

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Retirement accounts are just as important to prudent estate planning as real estate and wealth portfolios. With medical and other living costs rising, the key to responsible retirement savings and estate planning is looking ahead and choosing the right option for your portfolio.

However, it can be overwhelming to look through retirement accounts and estate planning. If you need help deciding which retirement options are right for you, seek out an estate planning lawyer for help with estate planning law.

To find a reputable lawyer in your area for help with retirement and estate planning, enter your ZIP code in our free legal help tool above.

Taxation of Estates

As a general rule, what wealth is not spent during retirement is attached to a person’s estate upon death.

So, if a couple saves up 3 million dollars in retirement accounts but only spends one million, two million would be attached to the couple’s estate and taxed upon the death of the second spouse.

Given the complexity and extent of the U.S. estate tax system, the best strategy for saving is keeping as much wealth out of one’s estate as possible, otherwise part of those hard-earned savings go straight to the government instead of loved ones and/or charities.

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Estate Planning with Traditional Retirement Accounts

Most people are familiar with traditional retirement accounts such as IRA’s and 401K’s. These accounts allow individuals to save a percentage of their earnings, which over time accumulates compound interest.

Upon retirement, the account is set up for regular payments to the retired person. The majority of these funds, however, tend to go toward medical expenses and assisted living care. An important piece of retirement planning advice for women is to save more than men, as women often live longer and therefore need more funds for assisted living care.

Setting up effective private medical insurance during one’s 40’s or 50’s will allow for most medical costs to be offset and less retirement money spent on end of life care, leaving more for inheritance.

Additionally, these accounts can easily be divided and portions placed into an irrevocable trust. The purpose of an irrevocable trust is to remove excess wealth from the ownership of the person and place it into a trust controlled by someone else.

This trust can still be for the benefit of the original owner for the remaining duration of their life, but it ensures that the funds are not considered part of the estate.

For especially large amounts of wealth, a series of trusts such as a QPRO or QDRO can be set up to funnel wealth in certain directions based on specific life event triggers such as incapacitation or the death of one spouse.

What are pension accounts?

Pension accounts are allocated retirement accounts based on years of service for a company or government agency. The longer an employee works for a company, the higher the pension payments become. With this in mind, it is vital that the person remains with this particular employer for a pension account to be successful.

Additionally, single-income homes consider a pension plan the property of both spouses after ten years of marriage. So, it is often prudent to consider drafting a provision into a pre-marital agreement that all pensions are the property of the person whose employer provided the account.

Otherwise, the pension plan will be pro-rated upon divorce and a portion of the plan will go to the divorced spouse. Finally, pension plans should always have a spouse named as the beneficiary, as most companies will continue to pay the agreed-upon amount as a widow’s/widower’s benefit.

Do’s and Don’ts of Retirement Planning

There are some things that should never be done with retirement accounts, as the result is a serious loss of wealth. First, avoid borrowing funds against any form of retirement account. Remember that a retirement account is a future income for a time when work is not possible, this is too important to risk.

Second, only change jobs if absolutely necessary and always transfer over previous retirement savings when entering a new job. Otherwise, accounts tend to get lost over time and funds may never be redeemed.

Third, always seek the advice of an estate planning attorney or certified wealth planner when establishing trusts or other forms of wealth allocation. Estate planning attorneys will have up-to-date information on current IRS policy and recommend the best course of action for ensuring full protection of retirement savings.

Frequently Asked Questions: Retirement Savings and Estates

To make sure we’ve answered all your questions about saving for retirement, estate tax pensions, and more, we’ve answered the most frequently asked questions about retirement and estates. Read on to learn more.

#1 – Are retirement accounts considered part of an estate?

If no beneficiary is named, then retirement accounts may become part of the estate. Retirement accounts may also be added to an estate. However, this is not ideal, as beneficiaries will receive less due to taxes.

#2 – Does estate planning include retirement planning?

While these two are related, estate planning is the distribution of assets after death, while retirement planning is planning assets for use while alive and retired. The two intertwine when estate planning includes the distribution of unused retirement funds after death.

The best way to save for retirement is to research the best retirement funds and use retirement savings calculators to determine how much you need to save.

#3 – Are retirement accounts included in wills?

Retirement accounts are generally not included in wills, as beneficiaries are already named when retirement accounts are opened.

#4 – What happens to a retirement account when the owner dies?

The remaining funds will go to the listed beneficiary on the account.

#5 – Who inherits if there is no beneficiary?

If there is no beneficiary, the retirement savings account will generally be added to the estate.

#6 – How do I avoid paying taxes on an inherited IRA?

Unfortunately, there is no way to avoid paying taxes. However, it is better to withdraw over time, rather than withdrawing all at once, as you won’t face one huge tax bill.

If you need help finding a lawyer in your area to help with estate and retirement planning, use our free legal search tool below.

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