What to do with my retirement plan?
Retirement plans: 401(k)s, 403(b)s, and IRAs are a few of the assets that
are generally not recommended to put into a trust. The nature of the instrument
is that any change of ownership or title can trigger the
early withdraw penalty from the IRS. There are also a number of benefits that your beneficiaries
may miss out on if the title is changed.
The most important benefit that can be lost is the option of the surviving
spouse to rollover the IRA, or 401(k) into their own IRAs. This allows
the surviving spouse to treat the money as if it had always been theirs.
In this way, the spouse is not bound by the age of the decedent to trigger
the required mandatory distributions (RMDs), but can use their own age
instead. A spouse can also convert a Roth IRA into their own Roth IRA.
For non-spouse and multiple beneficiaries, the assets can often be rolled
over into an inherited IRA in order to preserve their tax-free status
or cashed out without the early withdraw penalty (although income tax
will apply). If there are multiple beneficiaries, they each will need
to establish their own inherited IRA account or the account will use the
age of the eldest beneficiary to determine when RMDs must begin. Of course,
they can also cash it out, and pay the income tax immediately, depending
on their needs. The point is they have options to choose from, and that
is a real gift.
The important thing is to assign BOTH primary and contingent beneficiaries
to your accounts. You can also name the trustee of your trust as a beneficiary.
However, you should discuss this option with an attorney as it may limit
the options of your beneficiaries, and is only recommended in certain
circumstances.
For these reasons, we generally recommend that you maintain your individual
title in these pre-tax retirement accounts. So long as you assign beneficiaries,
probate will be avoided, and things are generally much simpler for your
loved ones.