Depositing wealth in an individual retirement account (IRA), a Roth IRA, or a 401(k) are estate planning tools that have become common over the past few decades. Most of these plans defer taxes until the money is withdrawn at retirement, but you may not be familiar with how they work when you withdraw funds early or if you pass away before you retire.
A diligent elder law attorney from Tully Law Group, PC, could ensure you follow the complicated rules surrounding retirement finances, as one mistake can cost you higher taxes and penalties. Our legal team is ready to discuss how your retirement benefits work in Melville so you feel prepared for the future.
IRAs and qualified plans do not impose income tax on the owner until retirement when withdrawals are taxed as ordinary income. Roth IRAs or a Roth account in a qualified plan accept contributions after taxes, although a distribution is not taxable, and if the distribution is considered qualified, the earnings are not taxable.
Qualified distributions occur when the owner reaches 59 and six months, dies, or becomes disabled, or after five years of making contributions. Penalties can apply for early distributions. However, some plans also permit early withdrawals for hardships or loans that are paid back to the plan with interest. Our Melville lawyers could discuss suitable retirement benefit plans for a person to adopt so their financial future is secure.
The Internal Revenue Service (IRS) imposes penalties for withdrawing funds from a retirement account too soon, but also too late. There is a required minimum distribution (RMD) that must occur, with some exceptions, on a required beginning date (RBD). The RBD is usually the April after the year the owner turns 70 and six months, although RMDs are not mandatory for Roth IRAs during the owner’s lifetime, but they are upon death. Failing to withdraw an RMD by the RBD comes with an IRS penalty of 50 percent tax on the RMD as well as federal and state income taxes, depending on the terms of the plan.
Besides income taxes and penalties for early or late withdrawals, retirement plans are usually considered part of a decedent’s estate and could elevate the value of other assets to exceed the cap for paying federal and state estate taxes. Unless Congress intervenes, the federal estate tax cap is set to be cut in half in 2026.
There is a federal income tax deduction for retirement account beneficiaries, under the Internal Revenue Code Section 6919(c), which deals with additional estate taxes incurred because of the addition of retirement plan assets. Our Melville lawyers could discuss in more detail how retirement benefits will affect taxes as they apply to a person’s estate planning. We will walk a person through the entire retirement-planning process so that they feel able to make the correct choices for them.
Many people believe that they can designate a beneficiary for retirement accounts in their wills. Although trust accounts can be beneficiaries, the owner’s estate cannot. When adopting a retirement plan, beneficiaries are named in the plan document, which circumvents probate. Even if a will names a different beneficiary to a retirement account, the beneficiary designated in the plan documents will prevail.
Assets in qualified plans are usually for the benefit of one’s spouse, and most require a spouse’s consent if a non-spouse is named beneficiary. It is always a good idea to review retirement plan benefits with a Melville attorney on a regular basis since circumstances change with divorce, the birth of children, remarriage, or a spouse’s death.
Qualified retirement plans and IRAs offer various tax breaks and will serve as your nest egg at retirement or benefit your loved ones when you pass on.
However, the IRS has implemented several rules you must follow, or you risk penalization. To discuss your retirement benefits in Melville in more depth, contact our firm now for an initial consultation.
