An IRA Can Help You Make Your Success Your Legacy.
Did you know that Individual Retirement Accounts (IRAs) can play a valuable role in the estate planning process? We will get into some tips and strategies shortly, but let’s quickly recap what you already know…
IRAs are a cornerstone of many retirement savings strategies, and for good reason: The ability to contribute pre-tax income – and to defer taxes until you start making withdrawals – means your savings can potentially grow more quickly than they could in a taxable account. But there is indeed more to IRAs than just tax advantages for retirement savings.
When deciding how best to pass wealth to future generations through the estate planning process, IRAs can offer powerful tax benefits to both you and your heirs. It goes without saying that estate planning strategies can be complex which is why we, at Modernize Wealth, are here to help.
Here are four tips and strategies to consider before incorporating an IRA into your estate plan. If you have any questions, please don’t hesitate to contact us.
Name Your Beneficiaries
The first step to incorporating an IRA into your estate plan is deciding who you want to name as the beneficiaries of your account. A real positive is that you can designate anyone you want, including people, institutions, charities, your estate, or a trust. But don’t rush this decision, consider it carefully, as IRA beneficiary designations are likely to supersede your will.
If you don’t correctly name a beneficiary, your IRA money may pass to an heir you didn’t choose. Certain beneficiary designations may also subject your heirs to unnecessary estate or income taxes, or even leave the account vulnerable to creditors.
By working with your team at Modernize Wealth, we can help you avoid such outcomes and make beneficiary designations that accurately reflect your final wishes.
Look Beyond the “Stretch” Strategy
New regulations about inherited retirement accounts have eliminated the once-popular “stretch” provision for IRAs. If you weren’t aware, this strategy let non-spousal beneficiaries take distributions over their lifetimes, allowing assets continue to grow tax deferred. However, the SECURE Act, passed in 2019, generally requires beneficiaries to withdraw all of the IRA’s assets within 10 years.
While the “stretch” strategy no longer exists, IRAs can still offer appeal as estate planning tools by allowing inherited assets to continue growing tax-deferred. However, since your beneficiaries’ distributions will be taxed as income, the 10-year distribution window may put a heavy tax burden on your heirs. If that’s a concern, another option is to convert your traditional IRA to a Roth IRA. While that conversion would put the tax burden on you, it would enable your heirs to take tax-free distributions.
Get Charitable
Naming a charitable organization as your IRA’s beneficiary may be an effective way to lower your estate tax bill. When IRAs are passed to heirs, they may be subject to estate and income taxes. However, IRA assets left to tax-exempt charities qualify for the federal estate tax charitable deduction, which can reduce the amount of taxes your estate owes.
You could also name a charitable remainder trust as the beneficiary of your IRA. That trust can be set up to deliver payouts to your heirs for a designated period of time; at the end of that period, the remaining assets are distributed to a qualified charitable organization. Because payouts can be made over long periods of time—in many cases, several decades—this strategy can provide the long-term tax deferral benefits similar to those offered by the bygone stretch IRA.
Review Regularly
Boxer Mike Tyson famously said “Everybody has a plan until they get punched in the mouth.” At Modernize Wealth we recognize that life happens. Things change. But it’s how you adapt your plan after a metaphorical “punch in the mouth” that will define your success, and your legacy.
As your life circumstances evolve you’ll likely need to adjust your IRA estate planning strategy, and update or even change your beneficiary designations. Take time to review your designations regularly with your financial advisor – Modernize Wealth clients have three review meetings a year – and make adjustments as needed.
Communication is Key
To create an estate plan that aligns with your long-term goals and the financial legacy you hope to leave, work closely with us, or your own advisor, to explore your various options. Together, we can help you build a plan that could meet both your needs now, and those of future generations.
Estate planning strategies can be complex and choosing a wealth management partner is a big decision, so if you have questions, we would love to hear from you. Call 480.346.1283 or email the Modernize Wealth team at hello@modernizewealth.com.
