Will Your Beneficiaries be Prepared for a Wealth Transfer?

Financial Planning

Managing taxes and planning for long-term illness or death are essential parts of financial planning. If you leave behind a 401K account when you pass away, your beneficiaries will be responsible for handling the account. The beneficiary of an inherited 401K might be faced with a taxable event upon inheriting the account, and the options that a beneficiary has concerning the distribution of an inherited plan depend entirely on how the plan was constructed. In nearly all cases, rolling your 401K into an IRA as part of your estate planning process can provide your beneficiaries with more flexibility in how they take distributions from the account.

Furthermore, any distribution a beneficiary receives from an inherited 401K or inherited IRA is taxable in the year it is paid. Under the SECURE Act, which went into effect at the end of 2019, all retirement accounts must be liquidated within 10 years of the original owner’s death. Heirs of high-net-worth individuals with large inherited retirement accounts could potentially face a significant tax liability in this event, which is why any beneficiary of a 401K or IRA should seek advice from a tax planner.

If you are a spousal beneficiary of a 401K or IRA account, you have options that other types of beneficiaries don’t have. In this case, you should consider rolling an inherited 401K into an IRA to maintain the tax advantages of the account. We will be able to go into more detail around these specific tax advantages and the significance around them.

Let us know if you have any questions about how to protect your beneficiaries along with helpful tips on how to be prepared for the unexpected.

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