There’s a good chance that some of your most valuable assets are inside your retirement account. Most people spend an entire lifetime working to generate money for retirement, but you may have amassed more than you need for your golden years. If you intend to leave assets behind for your loved ones, you need to plan for that specifically.ThinkstockPhotos-615104368

Most people have some kind of retirement account, whether it’s a pension 401(k) or an IRA, and there are common questions asked in this process, such as whether or not your beneficiaries will owe taxes on retirement accounts that are passed down to them.

There is a good chance that beneficiaries may owe taxes on retirement accounts, or are considered income in respect of a decedent and any amounts that are withdrawn from a non-ROTH account could be subject to income tax at the ordinary income tax rate. Remember that not all retirement accounts are treated the same way. 401(k)s and pensions are subject to more restrictions than IRAs, making this an important distinction for your beneficiaries.

An employer sponsored plan may often require that someone withdraw from their account within five years of the account owner’s death even if the beneficiary doesn’t want or need to withdraw money. All of these withdrawals are subjected to income tax. IRAs, however, can typically be stretched out over the life expectancy of the beneficiary, providing the benefit of continued tax deferred growth.

Talk to your estate planning lawyer about how to prepare for passing on your retirement account to beneficiaries.

 

 

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