What Is a Retirement Account?

According to the Investment Company Institute, it is estimated that there are over $20 trillion in retirement accounts as of December 30, 2013. Retirement accounts make up the majority of many people’s assets, and unfortunately, many owners of IRAs and their financial advisors are not fully aware of the complicated tax laws regarding distributions of these retirement accounts.

Many people focus on the investments within these accounts and their returns, but they overlook the important strategies that can save investors and their heirs’ money in the long run. The rules regarding retirement accounts, or IRAs, are different than rules that apply to other kinds of investment accounts, making their management complex.

Retirement accounts are different than other investment accounts!

Some of the things that make them different are that they:

  • Do not pass through the will (unless payable to an estate)
  • Are not subject to probate (unless payable to an estate)
  • Receive no capital gains treatment
  • Receive no step up in cost basis upon death
  • Cannot be gifted (in most cases)
  • The title cannot be transferred to a trust
  • Are subject to Required Minimum Distributions

Some people forget that, unlike other investments, retirement accounts have to be in the name of an individual and that the beneficiary designation will override any other estate planning document such as your trust, will, etc. Additionally, by placing a title of an IRA into a trust, you may cause immediate taxation. Therefore, it is imperative that you separate the retirement accounts from any other part of your estate when establishing a proper plan for distribution of these assets.

Through proper planning, you can set up your IRA so that your heirs, whether they are your children, grandchildren, or someone else, can receive what is called an Inherited IRA. There are various tax laws, regulations, rules, and even private letter rulings that may effect the decisions you make in setting up these Inherited IRAs. Investors should note that stretch or inherited IRAs are designed for individuals who will not need the money in the account for their own retirement needs.

Along with setting up the right types of accounts, it is imperative that you review the importance of choosing the right beneficiaries. An informed decision can help you better understand your options, when considering tools like Roth IRAs.

Retirement accounts are different because of the rules that they are governed by. It is extremely important to remember that there can be two sets of rules governing your retirement accounts:

  1. The IRA’s rules
  2. The IRA custodian or Retirement Plan Administrator’s rules

The law requires that you use the stricter of these rules. Your custodian does not have to match their regulations to the new tax laws, and while custodians cannot make rules that are more lenient than the IRS rules, they can make them more stringent. In that case, you would be required to follow your plan’s rules, even though the IRS tax laws would allow you to do differently.

In addition to understanding all the rules and regulations regarding retirement accounts and distributions, you should know not only what the IRS laws are, but what your custodian allows. Please make sure that in addition to reviewing all the IRS rules, you also carefully review your IRA custodian or Retirement Plan Administrator’s rules. This is a crucial part of retirement planning that should be taken as seriously as making your important investment decisions and choices.

The bottom line is that, while retirement account distribution and planning may look simple on the surface, it is something that should be taken seriously and worked through with knowledge of the rules, regulations, and tax code. If you have any questions about these accounts and how the can be used to your best advantage, call our office at (801) 274-1820 to set up an appointment.

Learn more about our Retirement Planning services.

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Is it Time to Rethink Retirement?

Saving as You Near Retirement

How Much Do I Need for Retirement?

Retirement Income Strategies

Your 401k Rollover Options

You’ve Started Drawing Money from your 401(k), Now What?


Sources: Investment Company Institute, December 30, 2014 Summary