Qualified Retirement Accounts

In this day and age, a large portion of the value of a person’s estate consists of qualified retirement plans: 401(k), 457, 403, Traditional IRAs, and Roth IRAs. When estate planning, be sure to include these assets in any planning you do.  

Inheriting an IRA

Here is an example from an accountant who said he had a client (we’ll call her “Debbie”) who needed help. The client’s mother, now deceased, had left her entire traditional IRA (about $400,000) to her oldest daughter with the intent that the daughter would distribute the IRA evenly among the five children.  

The first issue is that when Debbie inherits the IRA, Debbie now owns the IRA and is not required by law to distribute it to the other siblings. At that time (several years ago), Debbie could have rolled it into an inherited IRA and let it grow for her benefit until she reached retirement age. However, Debbie was honorable and wanted to do what her mother asked.

IRAs are regulated by the Internal Revenue Code and Treasury Regulations. They are designed to be used during retirement years, and penalties are applied if distributions are made before a person turns 59 and 1/2 years old. Debbie was in her mid to late 40s. To effectuate her mother’s wishes, Debbie would have to pay the taxes and penalties for early distributions when she distributed the funds to her siblings.

Gifting Versus Inheritance

The second major issue is gifting. When Debbie distributes the IRA to her siblings, it is not an inheritance coming from her mother, which would be tax-free, but is now a gift from Debbie to each sibling. Debbie, as the donor, would be required to pay the gift tax, if there is one, on each gift.  

The accountant is then left with the job of calculating penalties and taxes due, working backward to ensure Debbie did not bear the entire financial burden and would receive an equal share of the IRA as her siblings. 

Taxes on IRAs

The assets of an estate may be allocated among different beneficiaries to equalize an estate. It is not required that each beneficiary receive an equal share of each asset. Each IRA carries with it a tax burden — funds that go into the IRA tax-free, and the taxes must be paid on each distribution as it comes out of the IRA. Keep this in mind when allocating. An IRA worth $100,000 is not equal in value to a life insurance policy worth $100,000, because taxes must be paid on the IRA, while the life insurance is tax-free.  

Qualified Retirement Plans

Qualified Retirement Plans are not governed by a will, so you must ensure that you have designated beneficiaries on each plan you own. Take time to plan your estate, including qualified retirement plans, to ensure your plan will accomplish your goals. Consult a good estate planning lawyer, like an estate planning lawyer in Belgrade, MT, and your accountant when planning your estate, especially if your estate includes a qualified retirement plan.


Thanks to Silverman Law Office, PLLC for their insight into qualified retirement plans and estate planning.