Retirement savings can add up to a good sum over a lifetime, but what happens to these accounts when a person passes away? Whether you are creating a living trust or a will, your estate planning needs to address all retirement funds, from IRAs to 401Ks. Find out what happens to this money and how to prepare your documentation accordingly.

Who Gets Your Retirement Savings

When it comes to retirement funds, you must designate a beneficiary to inherit the remaining money in your account when you pass away. They can then cash out the account, paying the relevant taxes. Alternatively, they may choose to inherit the fund itself, putting off the tax obligation and using it as their own retirement fund.

In most cases, it’s best to “stretch” the fund. Any money cashed out is subject to income tax, which will eat into the estate’s value. There is the option to cash out over a period of five years instead of one lump sum. While this may allow the beneficiary to qualify for a lower tax bracket, it still means less money than they would get by deferring the cash-out.

Why You Need to Revisit Your Estate Plan

It’s essential to keep the named beneficiary for retirement funds up-to-date. For instance, if you named a spouse as the beneficiary of your 401K and never changed this after your divorce, they still have every right to collect that money. This applies even if other documents—like your last will and testament—have changed.

The financial advisor or broker you left in charge of the funds will handle the transfer. They are in charge of contacting the beneficiary you chose and explaining their options to them. You may also want to speak with your beneficiary, letting them know of this designation.

For help with all your estate planning needs in O’Fallon, MO, trust Attorney David Schmidt of Woodlawn Law Offices. With 25 years of experience, he is known for his honest and trustworthy legal counsel. He will provide you with the straightforward answers and guidance you need. Find out more about this lawyer’s practice areas online, or call (636) 240-6667 for an appointment.