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Estate Planning Basics: Retirement Assets

Estate Planning Basics

There are many aspects to consider for a secure financial future. Forbes describes how people are outliving their savings as life spans get longer. Essentially, this means that a retirement plan is crucial. But what happens to the retirement assets upon the unfortunate instance of death? Understanding estate planning basics will help deal with retirement assets and the sharing with of such among beneficiaries.

A beneficiary in this instance could be any person or entity that the owner has chosen to receive the funds upon death.

The choices of what happens to the assets can be complicated, especially with regards to meeting various legal guidelines. An estate planning legal advisor will provide professional experience and attention to detail, helping you put your family’s best interests first. Before meeting with a professional, it is a good idea to have an understanding of estate planning basics.

Various Retirement Asset Programs

Retirement accounts can exist in various forms such as an employer sponsored 401(k) plan and an Individual Retirement Account (IRA). All accounts are regulated by Internal Revenue Service (IRS) rules which stipulates guidelines for maximum annual contributions and penalties for early withdrawals.


A 401(k) plan is a tax-qualified, defined-contribution pension account. The retirement savings contributions are provided by an employer and deducted from the employee’s paycheck before taxation. A 401(k) participant over the age of 59 ½ can withdraw from their plan without penalty.  

When a 401(k) participant dies, their account becomes a part of their taxable estate. Generally, a beneficiary will be designated and will not need to wait until probate completion in order to receive the account balance as 401(k) qualifies as a Transfer On Death (TOD).

TOD is a term commonly associated with retirement assets as it allows beneficiaries to receive assets at the time of death without going through probate. The TOD also allows for the account holder or security owner to specify the percentage of assets to be received by the designated beneficiaries. In this instance, the named beneficiaries have no control over the person’s assets while they are alive. 

The beneficiary of a 401(k) account can be paid out in a number of ways including:

  • Lump Sum which needs to be paid no later than the 31 December of the year following the participant’s death.

  • Extended Payout which pays the beneficiary in annual installments throughout their life based on a calculated life expectancy. This payout is governed by IRS rules.

  • Spouse Rollover which offers a spousal beneficiary exclusive withdrawal options. These include rolling over the inherited money to his or her tax-deferred individual retirement arrangement, allowing them to avoid taxes and penalties.

Any money received by a beneficiary from an inherited 401(k) is taxable within the year that it is paid.


There are two different types of IRA namely Roth and Traditional IRAs. The main differences depend on income limits, tax incentives and withdrawal rules.

  • Traditional IRAs typically lower your taxable income in the contribution year, helping you to qualify for other tax incentives (such as the child tax credit). If you are under the age of 59½ then you can withdraw up to $10,000 without the normal 10% early withdrawal penalty.

  • Roth Contributions can be withdrawn penalty and tax-free. This is not applicable to earnings. Roth IRAs can be invested in multiple areas such as index funds, lifecycle funds and individual stocks.

An Inherited IRA is governed by a special set of tax rules which determine annual distributions. These distributions need to take place either during your lifetime or within five years after the death of the original account holder. There are the same options of Lump Sum distribution, Rollover and a Life Expectancy pay out.

Ultimately the distribution of your IRA funds will be determined by the beneficiary designation. For example, if you have two children as your beneficiaries and they are both alive when you pass, then the funds will be distributed as stipulated in an inherited IRA account. If one child dies before your time and the beneficiary designation is not updated, then there are two common defaults. The first is per capita, meaning that all funds will go to the surviving child. The second arrangement is per stirpes which grants the shares to the deceased beneficiary’s children.

Key Considerations

Regarding a 401(k) plan, it is important to realize that each plan has its own set of rules that fall within limits set by the IRS. As a beneficiary, this means that the first thing you should do when you inherit a 401(k) account is to find out what rules apply in your specific situation.

Regarding an IRA, it is important to ensure that your paperwork reflects your wishes. The distribution of IRA money is dependent on what the beneficiary designations say – and not the will. The passing of a loved one already causes distress – finalizing their retirement assets should not add to the grief. The processes can be complicated and it is best to contact a trusted legal advisor for assistance.

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Gary I. Handin, P.A.

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