Centara Connection

When Leaving Your Retirement Plan to Your Beneficiaries, Talk to Them!

Brittany Oates, Estate Planning Attorney

Leaving an IRA or other qualified retirement plan to your beneficiaries can be a great idea. Done properly, your beneficiaries can “stretch out” the tax-saving benefits of the plan over their lifetimes. However, if you are planning to leave someone a retirement plan, you should discuss it with them first to make sure they understand how to properly plan.

There are numerous traps they could fall into that would destroy the tax benefits of the arrangement. Some people who have inherited an IRA immediately liquidate it without considering the consequences. The result is that they are immediately hit with a large tax bill. If they had kept the IRA, they could have stretched out the tax bill over many years and allowed the money to grow tax-free over that time. Another common mistake is that a beneficiary will roll an inherited IRA over into his or her own IRA, or withdraw the money and create a new IRA. Both of these actions can create big tax disadvantages.

The rules are more lenient if you inherit an IRA from a spouse. If you’re thinking of leaving someone a 401(k) plan, it’s a good idea to check the rules of the plan first. Many plans require an inherited 401(k) to be liquidated almost immediately. You might be better off rolling over the 401(k) into an IRA, and then leaving the IRA to your heirs.

Centara Legal Group, APC
8880 Rio San Diego Drive, Suite 450
San Diego, CA 92108
(619) 400-1900
www.centaralegal.com
info@centaralegal.com