Blog: Whether you are already retired or are thinking about it, establishing a plan to coordinate both anticipated retirement goals and a plan for legacy assets is critical. Depending on their intended purpose, your assets may need to be managed distinctly differently to allow for a cohesive, successful outcome.
Where to Begin? When developing (or making changes to) your estate plan for retirement assets, it’s important to first identify your goals: Do you want to leave the bulk of your assets to your kids? Do you have big plans to support charitable causes with your estate? To achieve your goals in the best way possible, you’ll need to get familiar with how your assets will flow, both for retirement and then to your heirs.
Having your accounts titled and earmarked to pass appropriately may enable an efficient tax result, securing a successful retirement and transfer to the ultimate recipients. You can avert problems by checking beneficiary designations, titling, and other legal documents, to align your assets according to your plans. Finally, adjust your plan when your intentions, beneficiaries’ circumstances, and tax rules change to optimize your results.
Plan for Both Core Assets and Excess Capital. If you’re retired or getting ready to retire, you’ll be advised to review your investments and income. Stable sources of income, such as pensions, annuities and Social Security may be supplemented by distributions from taxable investments. Required minimum distributions from tax-deferred traditional IRAs and other qualified plans beginning at age 72 (for those turning age 70½ in 2020 and thereafter) may also be part of the mix. Your core capital should include resources necessary to cover anticipated annual expenses, along with sufficient reserves to address unanticipated medical, long-term care or other episodic expenses. Those with surplus retirement assets should also consider planning for excess capital intended for their estate’s heirs.
Optimize Legacy Planning for Retirement Assets. Once you’ve identified the core capital you need to fund your day-to-day expenses, it may be advantageous to segregate the excess capital reserved for wealth transfer. If not earmarked, excess capital may not be managed effectively for tax or investment purposes over the long term.
Establish a Plan for Your Taxable Assets. It may be surprising to know that children or other individuals can be better off inheriting highly appreciated taxable investment accounts rather than a traditional IRA. That’s because these types of accounts currently qualify for a step-up in cost basis. The step-up enables a beneficiary to sell the appreciated assets they receive as an inheritance without incurring capital gains taxes on the appreciation.
Plan Separately for IRA and Tax-Deferred Assets. On the other hand, traditional IRAs and other qualified assets, considered “income in respect of a decedent,” do not receive a step-up in basis. Those assets will generally be subject to ordinary income tax rates. Therefore, a $100,000 IRA passing to a child will be taxed at the child’s ordinary income tax rate when withdrawn. A child in a 37% marginal income tax bracket who withdraws the entire account can subject the distribution to taxes at 37%.