How To Pick The Right Retirement Account For Your Estate Plan?

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Introduction: What is a Retirement Account?

A retirement account is the process of setting aside money to be used upon your retirement from the workforce. There are multiple options when setting up a retirement account: Pension, 401(k), or Individual Retirement Account (IRA).

Each retirement account comes with its own set of pros and cons. Compared to an IRA, pensions and 401(k)s enforce stricter rules and requirements towards the beneficiaries of such accounts.

For example, a retirement plan that was sponsored by an employer requires the beneficiary to withdraw money from the account within 5 years regardless of whether they need the money or not. Furthermore, any withdrawals by the beneficiary obligate them to include it in their income tax returns.

An individual retirement account is more flexible because it can be used or kept untouched throughout the beneficiary’s life, all the while continuing to grow through tax-deference and lessen the beneficiary’s liability to pay income tax.

This is in thanks to an act signed into law on the 20th of December 2019, called the Setting Every Community Up for Retirement Enhancement (SECURE) Act, which allows stretching the account’s usability for beneficiaries as long as they are considered eligible. Eligibility requires the beneficiary to be:

  1. The surviving spouse
  2. The owner’s child, who is still a minor
  3. A person who is disabled or chronically ill
  4. Someone who is ten years younger than the account owner upon death, but not any younger than that

In case a beneficiary is not eligible for the stretching of the account’s usability, then all assets placed in the retirement account has to be given to them on the 10th year of the account owner’s death.

Coming up with a steady retirement plan ensures you have a comfortable life once you retire or at the very least, it will be there to assist you or your loved ones financially.


  1. Setting up a retirement account sponsored by your employer may reduce taxable income.
  2. It can also be arranged easily through deductions made via the company’s payroll.
  3. Any contributions or gains through investments that are earned over the years through the retirement account are not subject to tax until distribution to the beneficiaries.
  4. You receive peace of mind once you near retirement age because you know you’ll have the means to take care of yourself.
  5. You can set up your trust or retirement plan to be distributed to any heirs or charities you wish to donate to.
  6. If you pair your retirement plan with a trust, then you will be able to have more control over what happens to your account once you are gone.
  7. It will also prevent creditors from coming near your money once it is distributed to your beneficiaries.

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Designating Beneficiaries

Beneficiaries who are passed down a retirement account may be held liable for paying taxes for the account they received. Tax is less likely if they receive assets such as real estate, life insurance, nonretirement investment accounts, and vehicles as these assets aren’t considered income upon inheritance.

Most people usually assign their spouse as one of the main beneficiaries of their retirement plan. Second to the spouse are the children and other relevant individuals the owner wants to support. However, simply assigning beneficiaries may cause issues down the line.

It is recommended that the retirement account is left to a trust to protect it from creditors hounding after the beneficiaries of the trust or account. However, the same eligibility still applies regarding the duration of the retirement account’s availability.

A trust offers more control and assurance that your money will go to the right people at the right time. It protects the balance you’ve earned from creditors or the court. It gives value to the wishes of the deceased owner of the trust for as long as possible.

When choosing the kind of trust to assign the retirement account to, an accumulation trust will offer better protection compared to a conduit trust because any distributions in an accumulation trust are allowed to build up.

This can’t be done in a conduit trust because it requires distributions to be distributed immediately to the beneficiary.

It is advised that you speak with an estate planning attorney so that you are fully aware of the consequences related to income tax if you leave your retirement account to a trust. Remember, the higher the accumulated tax in an accumulation trust, the higher the tax rate the beneficiary will have to pay.

Retirement trusts have to be drafted very carefully to ensure maximum benefits for its beneficiaries. Mistakes may result in the beneficiaries only receiving five years to exhaust the balance of the retirement account.

This would result in a higher income tax bill within a short span of time and the money can be claimed immediately by creditors in the event of bankruptcy claims and the like. Mistakes also waste the deference in tax growth.

The Final Word

There are a few retirement plans to choose from depending on the level of flexibility you expect for your estate and for your beneficiaries. Most of the time, funds coming from a retirement account are still susceptible to income tax rates upon withdrawal or use by the beneficiaries.

However, owners of the accounts are given a lesser tax rate should they use their retirement money. Peace of mind is important as you grow older, so it is recommended that you look for a stable retirement plan that fits your income levels in order to have a fulfilling life even after you retire.

Look for competent attorneys like Dallo Estate Planning, PLLC, who have experience so that you can reap maximum benefits and ensure nothing goes wrong in the distribution of your account. A trust will usually be recommended in order to have flexibility and control over what exactly will happen to your account once you pass.

Lastly, a trust protects your beneficiaries from creditors or anyone else who may try to lay claim on the money.

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