If you are like many others, you have amassed a nest egg to carry you through retirement. But, have you given any thought to what will happen to the remaining funds when you are gone?
The three biggest planning errors that people make with their retirement assets relate to their beneficiary designations:
- Not designating a beneficiary
- Designating the wrong beneficiary
- Not protecting the beneficiary from bad decision-making
A huge benefit to those you bless with your remaining retirement savings is achieved by leaving as much of the money in the account, growing tax-free, for as long as possible. The first step is for you to name a beneficiary. Otherwise, the entire fund typically has to be withdrawn within five years of your death, and the funds are subject to income tax in the year they are withdrawn.
The second step is to make sure that you have named an appropriate beneficiary. Spouses enjoy especially favorable treatment as beneficiaries of retirement accounts. Charities are great choices as beneficiaries because they are not subject to income tax when the funds are withdrawn. Responsible adult individuals can also enjoy significant benefits. But naming a minor, a less responsible (or an uninformed) adult, for example, can negate much of the tax-savings that you planned.
If you are concerned that your beneficiary may make bad decisions regarding the use of your gift, a carefully drafted IRA Trust can be formed and the Trust named as the retirement account beneficiary. These trusts must meet very strict rules and regulations to maximize the benefits but, if they do, they can provide flexibility and tremendous benefits. You can get more information by contacting a trust and estate attorney.