Retirement Assets: Frequently Asked Questions

Yes, generally under the same rules that would apply to your withdrawals of the same amounts had you lived - unless it's a Roth IRA. A Roth IRA is exempt from federal income tax if the account was opened five years before any withdrawals.

Also, your spouse can roll over your account to their IRA. No early withdrawal penalty applies, regardless of your beneficiary's age. However, a spouse who rolled over to an IRA may owe an early withdrawal penalty on IRA withdrawals taken before age 59½.

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Your retirement assets will be included in your taxable estate. But because of the currently high estate tax exemption, very few estates have to pay federal estate tax. And assets passing to your surviving spouse (provided he or she is a U.S. citizen) or to charity will be excluded from estate tax.

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No. The estate is taxed on the annuity's present value.

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You can minimize or eliminate tax on inherited retirement assets by using the following methods:

• Leave them to your spouse. Doing so can eliminate estate tax and help postpone withdrawals subject to income tax - provided your spouse takes no withdrawals before age 59½.
• Leave them to charity. Although there's no financial benefit to the family, this saves income and estate taxes.
• Provide life insurance to pay estate tax on retirement assets. If estate taxes are a concern, the benefit of this option is that it provides estate liquidity, avoiding taxable distributions to pay estate tax.

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If your assets are in a tax-favored retirement fund such as a defined-benefit pension plan, 401(k), or IRA, you have several distribution options:

• Take everything in a lump sum
• Keep the money in the account, with regular distributions or withdrawals on an as-needed / as-required basis
• Purchase an annuity with all or part of the funds
• Take a partial withdrawal (leaving the balance for withdrawal later)
• Make a rollover distribution to another retirement plan
• A combination of any of the above

Your retirement assets may be distributed in kind as employer stock or an annuity or insurance contract. Sometimes certain withdrawal options may be associated with certain retirement plans; for instance, annuities are more common with pension plans. Other types of plans favor the other options, but for the most part, most of these options are available for most plans. And more than likely, you'll want to preserve the tax shelter as long as possible by withdrawing no more than you need at any given time.

Timing your withdrawal can be a factor, too. Withdrawals before age 59½ risk a tax penalty. At the other end, withdrawals are generally required to start at age 73 for taxpayers born between 1951 and 1959 (75 for those born in 1960 or later) or face a tax penalty. The only exceptions are Roth accounts and non-owner-employees still working beyond that age.

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Your personal needs should decide. You may need a lump sum to buy a retirement home or business, but be aware of the tax consequences. If your employer requires that you take a lump sum distribution, it may be wise to roll it over into an IRA.

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There are several things you might do depending upon your needs:

• If you don't need the assets to live on, try to continue the tax shelter and leave the money where it is.
• Transfer or roll over the assets into your new employer's plan if that plan allows it (this can be tricky, though).
• If you've decided to start your own business, set up a new retirement plan and move the funds there.
• Roll them over into your IRA.

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In general, employer plans such as your 401(k), IRAs, and pension plan funds are protected from general creditors unless you've used these assets as securities against a loan or are entering into bankruptcy. If this is the case, there's a chance they could be seized, but if the money is in a registered IRA, pension plan, or 401(k), it's more than likely they will be protected in case of bankruptcy (subject to state and federal law of course).

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Each state is different, but in general, consider the following:

• While withdrawals are generally taxable in states with income tax, some offer relief for retirement income up to a specified dollar amount.
• If your state doesn't allow deductions for retirement investments allowed under federal law, these investments and sometimes more may come back tax-free.
• State tax penalties for early or inadequate withdrawal are unlikely.

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Retirement plans offer the biggest tax shelter in the federal system since funds grow tax-free while in the plan. But the shelter is primarily intended for retirement. So when you reach 73 (or shortly after that), you must start withdrawing money from the plan.

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The shelter can continue for many of those assets for a long time, assuming you don't need them to live on. You can spread withdrawals over a period based on, but longer than, your life expectancy, for example, over a period of at least 26.5 years if you're 73 now. You are free, however, to withdraw at a faster rate or even all of it if you wish. The shelter continues for whatever is not withdrawn.

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Many rules regarding inherited retirement accounts changed with the passage of the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 and the SECURE 2.0 Act of 2022. For example, if you're a spouse not more than ten (10) years younger than your deceased spouse, you will have different options than if you were more than ten (10) years younger. Due to the complexity of these rules, it is important to speak with a qualified financial advisor before making any decisions.

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Money from retirement plans, including 401(k)s, IRAs, company pensions, and other plans, is taxed according to your residence when you receive it. You will save money on state income tax if you move from a state with a high personal income tax to one with no personal income tax. Also, some states with a state income tax don't tax retirement plan distributions. Others offer other tax relief for retirement income. However, establishing residence in a new state may take as long as one year; if you retain property in both states, you may owe taxes to both.

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