What to do with my retirement plan?
Retirement plans: 401(k)s, 403(b)s, and IRAs are a few of the assets that are generally not recommended to put into a trust. The nature of the instrument is that any change of ownership or title can trigger the early withdraw penalty from the IRS. There are also a number of benefits that your beneficiaries may miss out on if the title is changed.
The most important benefit that can be lost is the option of the surviving spouse to rollover the IRA, or 401(k) into their own IRAs. This allows the surviving spouse to treat the money as if it had always been theirs. In this way, the spouse is not bound by the age of the decedent to trigger the required mandatory distributions (RMDs), but can use their own age instead. A spouse can also convert a Roth IRA into their own Roth IRA.
For non-spouse and multiple beneficiaries, the assets can often be rolled over into an inherited IRA in order to preserve their tax-free status or cashed out without the early withdraw penalty (although income tax will apply). If there are multiple beneficiaries, they each will need to establish their own inherited IRA account or the account will use the age of the eldest beneficiary to determine when RMDs must begin. Of course, they can also cash it out, and pay the income tax immediately, depending on their needs. The point is they have options to choose from, and that is a real gift.
The important thing is to assign BOTH primary and contingent beneficiaries to your accounts. You can also name the trustee of your trust as a beneficiary. However, you should discuss this option with an attorney as it may limit the options of your beneficiaries, and is only recommended in certain circumstances.
For these reasons, we generally recommend that you maintain your individual title in these pre-tax retirement accounts. So long as you assign beneficiaries, probate will be avoided, and things are generally much simpler for your loved ones.
