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An Estate Plan Can Help You Minimize Taxes on Retirement Assets

As American workers approach retirement, many accumulate a significant amount of wealth in their 401(k)s, IRAs or other employee retirement accounts. As with other assets, it is vital to consider retirement accounts when doing estate planning. If done properly, a sound estate plan can ensure that your retirement assets go to your heirs without being heavily taxed.

Beneficiary Designations

When you start your retirement account, you are asked to designate a beneficiary-a person or organization who you want to receive the balance in the account after your death. In many cases, you will also be able to list a secondary beneficiary, who will receive the funds in your account in the event that your primary beneficiary is not living at the time of your death.

Spouses, Young Relatives and Charities Make Great Beneficiaries

One of the main benefits of retirement accounts is they let you defer paying income taxes on what you contribute to the account until you (or your beneficiary) start withdrawing funds from the account. However, the laws also require you to start withdrawing funds once you reach a certain age.

If you name your spouse as beneficiary, upon your death, he or she can rollover the funds in your retirement account to his or her own retirement account and delay having to withdraw funds (and pay income taxes on those withdrawals) until he or she is 70.5 years of age.

Naming young relatives as beneficiaries can be a good idea, as it gives them the option to delay withdrawing the funds over the longer period of their life. By law, the young relatives will not have to withdraw funds until they are in their later years, giving them years of tax-free growth.

If you would like to leave money to a charity, consider financing your gift with your retirement plan funds. Leaving your money to a charity allows a deduction from estate taxes, allowing the funds to pass to the charity free of estate or income taxes.

Know Your Retirement Plan

Before beginning your estate plan, know that all types of retirement accounts are different. Some accounts, like IRAs, are governed by federal law, which means the same rules to apply to each IRA. Employer retirement plans, however, are not uniform. There may be restrictions on who may be a beneficiary or prohibitions on rolling over funds.

Despite the differences between the types of retirement accounts, a good estate plan can leverage the type of account that you have to your advantage and ensure that the funds in your retirement plan pass to your intended beneficiaries with a minimum amount of taxes.

Source:, "5 facts about estate planning, retirement benefits," Maria Baler, 12/5/11.

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