Retirement Accounts and Estate Planning: How to Integrate Your IRA and 401(k)

Narrator: You are listening to the legacy talk podcast hosted by James A. Jones, attorney at law and founder of sound legacy law, PLLC in Tacoma. Attorney Jones is here to talk about how to best protect your family assets and well, pulling stories from his more than 20 years of helping families and business owners protect their assets, create their estate plans, preserve their wealth and plan for the future.

Nobody wants to think about estate planning, but life has a way of sneaking up on you and. And at any moment, something unexpected could happen that will leave you regretting not having acted sooner. So join attorney James A. Jones in the Legacy Talk podcast and together learn how to plan for your future today and have peace of mind tomorrow.

Atty. James Jones: Welcome to Legacy Talk. I’m your host, James [00:01:00] Jones. I’m an estate planning and probate attorney from Tacoma, Washington. I’ve been practicing for over 20 years, and my main practice areas include estate planning, probate, and estate administration. On Legacy Talk, we discuss topics surrounding families and estates.

Estate planning can often be a confusing and complicated topic. But my goal with this podcast is to make it accessible and understandable to those who need it. So if this is something that interests you, I’d appreciate it if you click the subscribe button and like this episode so that you can follow along as we break down the barriers to estate planning.

I’m excited to get to today’s episode. Today’s episode’s topic is retirement accounts and estate planning. How to integrate your IRA and 401k. Because retirement accounts are treated differently than the run of the mill accounts that you might have and other assets that are part of your estate plan and must be specifically addressed as part of a effective estate plan.

So on today’s show, we’re talking about retirement [00:02:00] accounts and estate planning, how to integrate your IRA and 401k. So let’s get to it. Most people have retirement accounts, right? That work. If you work for a company, you have a retirement account. If you work for Boeing or Microsoft or The mom and pop down the street, you probably have an IRA or a 401k.

You might have a 403b if you’re a government worker. These are accounts that are specifically authorized by us law that allow you to save for retirement in a tax free manner. So they allow for tax free growth of retirement savings, but because they’re established through us law, And bound by U. S. law, they’re complicated and treated differently than your run of the mill checking account or brokerage account, right, or CD or whatever like that, right?

And so they’re complicated. And so we have to treat them differently so that [00:03:00] we can maintain the tax deferred nature of the account. So there’s things that must be considered when coordinating these IRA style accounts with your estate plan. And making sure that You consider all of these details that are necessary is essential as part of an effective estate plan.

So today we’re going to discuss some things to consider with regard to your retirement accounts and how we make sure that those accounts are effectively integrated within your estate plan. And so let’s get to it. So just to start off, I’m going to mention this. Okay. I’m not a financial advisor. I’m an estate planning attorney.

I’m not giving financial advice with regards to how to deal with your IRAs. or 401ks or anything like that. That’s something that you should use your financial advisor for. If you don’t have a financial advisor, go back and listen to the episode I did with Melissa Cornier, who’s a friend of mine and financial advisor as to why we should have one, right?

It’s really important that you [00:04:00] have someone that’s an expert or professional to help you with your financial assets as far as investing advice retirement planning, things like that. So to start off, I really recommend talking to someone that’s a financial advisor. With regard to all of these issues, as far as investing, when to take money out, when to put money in, where to invest it, all of that kind of thing.

The discussion today is going to be about how these types of accounts can integrate with your estate plan and work with your will or trust or whatever, right? To make sure that they get distributed and coordinated with how your other assets are distributed. And the other thing I want to mention is a retirement account, like there’s a 50 million different kinds of accounts.

Probably not that many, but not that many, but there are a lot of different kinds of retirement accounts, right? The 401k, 403b, the IRA, the Roth IRA, the SEP IRA, the simple IRA, like there’s a billion different kinds, right? And there’s, more than I even know. Okay. Essentially when you [00:05:00] retire, when you are no longer a part of like a company or a school district or a governmental agency or whatever, That retirement plan, more often than not, converts into a, an individual retirement account.

Okay, so that 401k, if you do it right, and hopefully you talk to your financial advisor, but when you leave your company and retire, you don’t just leave that in the 401k plan, you put it in an IRA, typically, that you control. And you control where that money’s invested, and you have way more control in that than you would in like a institutionalized 401k that’s sort of set up for the Typical employee that doesn’t wanna look at their stuff.

So when I say IRAI made us say IRA, and I may not say 401k, I may not say 4 0 3 B. When I say IRA, I mean retirement account. Okay. Or when I say a retirement account, I mean IRAs, 4 0 1 Ks, 4 0 3 Bs, all that stuff. Okay? Just to set the table on that. Okay? So. So that’s the first [00:06:00] thing that we want to talk about is understanding these retirement plans.

Okay. Retirement accounts like traditional IRAs or Roth IRAs or 401k plans are instrumental in building retirement savings. They’re traditional IRAs and 401ks, which offer tax deferred growth, meaning that money that you put into those types of accounts is tax deductible from your income and the earnings grow tax deferred.

until they’re withdrawn. So that means when you put money in an IRA, a traditional IRA or a traditional 401k, all the growth on those assets is tax free, right? There’s no taxation or tax deferred, I guess I should say. And fees are a lot cheaper too. So there’s things, there’s benefits to it, which talk to your financial advisor about that.

But when you pull the money out, the government wants the tax. Okay. So that we’ve been waiting all these years, we’ve been waiting 30, 40, 50 years for you to pull this money out. We’re [00:07:00] going to tax it when it comes out. Okay. On the other hand, Roth IRAs are accounts where you put in after tax contributions.

So pre tax contributions or pre tax accounts are like the traditional IRA 401k, 403b. After tax account are typically when I say, do you have any after tax, is this after tax money? I’m usually talking about bank accounts or brokerage accounts or anything like that. But there is a retirement account called a Roth IRA, which you’ve most likely have heard about.

Which is after tax money, but the money that you put in is not tax deductible, but you don’t have to pay the tax on the money coming out. So you still get the tax free growth, but you don’t have to

pay tax when you pull it out. So it’s tax free income when you pull it out. So, Roth IRAs are pretty good as far as being able to access that money without paying additional tax, because you’ve already paid the tax on the money you put in. Whereas, with a traditional IRA, you haven’t paid tax on [00:08:00] that money.

It comes out later. Okay, so retirement accounts are not the type of an account where so typically if we’re going to talk about a trust for an estate plan and trust is something that avoids probate, in most cases, it can avoid estate taxes, right? Things like that. When we talk about trusts, we talk about those assets being retitled in the name of The trust certain assets like your house typically or your bank accounts or your after tax Brokerage accounts like your investment accounts CDs stuff like that.

I always advise Hey, make sure those accounts are titled in the name of the trust so that they avoid probate. We don’t retitle individual retirement accounts into the name of the trust and the reason why is Because a trust can’t own an individual retirement account an individual retirement account is owned by an individual human Okay, and so, trust can’t own [00:09:00] those while you’re using them, while you’re creating them or funding them, okay?

They can own them later, but that’s a different topic. So when you’re still working, and we’re working on increasing the amount of money in our 401Ks and IRAs and 403Bs, etc. We don’t retitle those accounts, because if we did, if you’re still working and you’re under 59 and a half, I believe is the age, you’d get penalized first for taking the money out early.

And secondly, you’d have to pay the tax on the money that you put out. So, because an individual has to own that account and a trust can’t, while it’s being funded, right, and growing tax deferred, we don’t retitle those accounts, okay? So, the way that we deal with those accounts is through beneficiary designation.

And making sure that these beneficiary designations are correct is essential on your estate plan. So they did these designations di dictate as to who’s going to inherit these retirement [00:10:00] accounts when the owner dies. Right? These beneficiary designations bypass probate, so we wanna make sure the assets are in trusts when we do a trust plan so that we can avoid probate beneficiary designations.

Also avoid probate. So by designating your beneficiaries on your IRA accounts, that will also avoid probate. So that doesn’t, by not putting ’em in, the trust is not fatal to the probate avoidance part of. An effective trust estate plan, okay, but we want to make sure that these beneficiary designations sink.

Okay, and we’ll talk about that in a minute and we want to make sure that these beneficiary designations are updated when things change, right? When there’s a marriage or a divorce or a birth of a child, right? Or death of a beneficiary. We want to make sure that these beneficiary designations are the way we want them.

So we want to look at them as regularly as we look at our estate plan. Okay. two to three years, every two to three years or major life events. You want to look at those things. [00:11:00] Okay.

The third thing to consider with regards to your retirement accounts and your estate plan is the tax implications. Okay. The tax treatment of inherited retirement accounts based on their type, which is a traditional versus a Roth IRA, and the relationship to the beneficiary to the owner of that account, like a spouse versus a child or a non spouse.

Traditional IRAs and 401ks inherited by a non spouse. typically require the distributions are subject to income tax, whereas the Roth IRA, like we talked about, don’t require income tax upon distribution. And there’s different ways they’re treated. If it’s a spouse that owns the account or inherits the account versus a child owns the account.

Okay. So some strategies to consider with regard to your estate plan are basically dealing with a direct beneficiary. You can name your spouse as a beneficiary. Typically that’s your primary goal is your [00:12:00] spouse is the primary beneficiary of your retirement account because they have more advantages, which we’ll talk about in a minute.

But you can also for younger kids or for your children in general, you can name trust as beneficiaries of these IRA accounts to provide control over distributions, protect those assets once they come out, because they’re going to have to come out. Okay. They’re going to have to come out of that retirement account over a period of time, which in most cases is 10 years.

There was an act called, a new law in 2019 called the Secure Act, which basically indicates or requires that anybody but a spouse that has an inherited IRA must take that money out within 10 years. Okay, because they want their money. The simple truth to it is this money has been sitting in there tax free and the government wants it and they need it.

And so they’re going to take, they’re going to make you take it out. Okay, within 10 years in most cases. So. By putting those assets in a trust for minor beneficiaries or beneficiaries that aren’t great [00:13:00] with money or beneficiaries who are getting a lot of money and you don’t want them to have additional estate taxes, a trust is a significant benefit.

And then another thing to do is if you have a large estate or if you want to make charitable contributions, giving retirement accounts to charity is a huge benefit because oftentimes those are tax free to the charity and You get a write off, of course, for giving that money, right? You get a write off for giving that money to charity.

And so, that’s just something to consider. You can also put them into certain trusts, like charitable remainder trusts and other things like that, which we’re not going to get into today.

The fifth thing to consider. There’s something called, you may have heard this, you probably have if you’re contemplating retirement or have done any research or thought about IRAs or retirement accounts. The dreaded RMD, Required Minimum Distributions, okay? When you retire, At a certain age, you have to start taking RMDs, which is a percentage of your retirement accounts, 4 percent or [00:14:00] something like that it’s variable, I think, but it’s around 4 percent that you have to take at least this much every year, okay, whether you need it or not, and the reason why is they want to pull the tax off that distribution, because otherwise, that’s going to sit there, you know, maybe never get taxed if they don’t make you take it out, and so RMDs for inherited accounts are still required.

And under the SECURE Act, like I mentioned, most non spouse beneficiaries have to take these inherited accounts out within 10 years of the owner’s death. And so this, it’s harder to stretch these out. You used to be able to do a stretch IRA, which would allow you to lengthen the period of time that the money was in an IRA versus having to take it out in 10 years.

Can’t do that anymore in most cases. And so, you want to make sure those required minimum distributions are taken. And if they’re, if it’s a minor beneficiary or a younger person that’s a beneficiary, ideally those required minimum [00:15:00] distributions are reinvested in something, right? And they’re not just taken out of say you put a retirement account into a trust or name a trust as beneficiary.

You want to make sure that those retired or required minimum distributions are considered as far as remaining in that trust, right? They’re just not going to the beneficiary directly. The beneficiary can reinvest those in a brokerage account and other stocks so that those assets don’t have to be taxed later.

Right? Cause in 10 years, if you inherit a million dollar IRA or something, that 10, that million dollars will be out of your trust and back into your taxable estate. If you don’t take, if you take all those RMDs in 10 years and don’t leave those in the trust. So that’s important to consider RMD manipulation.

So the next thing to consider is who is your beneficiary? Okay. Spousal versus non spousal beneficiaries. So regarding a surviving spouse, the surviving [00:16:00] spouse can roll an IRA into their own IRA, or they can opt to take it out over 10 years, whichever makes the most sense to them. Non spouse beneficiaries, like I’ve been saying, have to usually take it out within 10 years.

If they’re a minor child of the person who owned the IRA, like if your child is a beneficiary, That child doesn’t have to take that money out until they’re 21 in most cases. Or even start taking RMDs, I guess I should say. They don’t have to take it out when they’re 21, but they have, they don’t have to start thinking about taking it out until they’re 21.

Also disabled child, children, or people. Right? If you name disabled people, they aren’t required under that there’s exempt exemptions for them under the 10 year rule, which we won’t get into the specifics of those, but there’s a couple options. So the spouse doesn’t have to take it out within 10 years.

Minor children don’t have to start taking the money out to their adults. And then potentially disabled people don’t have to take the money out under that 10 year window either, as long as they meet the exemption [00:17:00] requirements.

Number seven, as far as things to consider is the overall coordination with your estate plan. Okay. So. A lot of the time, retirement accounts okay, I’m going to do my will and my trust, and I’m going to give this much to this kid, this much to this beneficiary. I’m going to give this to charity.

And a lot of the time those retirement accounts are just sitting out on their own, right? They’re just like, well, I’ve got a beneficiary and those, I don’t worry about them, but are they. synced basically with the plan. Are you considering, like, if that’s your biggest asset or one of your biggest assets, you have a million or 2 million bucks in your IRA or something after a long career and great growth in the stock market, which in many cases you can do you want that whole amount to go just to one beneficiary?

Do you want to make that match what your other estate plan basically says or what your documents say? Okay. So we want to coordinate and make sure that beneficiary designations compliment the provisions of And [00:18:00] avoid conflicts and avoid unintended consequences, right? We want to make sure that if it makes sense to give a minor kid some IRA money, and because they can hold it longer than an older kid, you know, maybe that makes sense to give the younger kid the money first, they can hold that tax deferred growth longer than an older kid would.

So those are some things to consider. And like anything with estate planning, you want to make sure that you’re regularly reviewing this. The laws change frequently. We just had this major law change in 2019. And these laws have changed quite a bit over the 21 years I’ve been practicing. They’ve changed a few different times.

And so we want to make sure that we’re up on that and that our plan still matches the law and makes sense under the law or new laws. Okay. So we want to regularly review these IRA accounts and our estate plan with your financial advisor, of course, and then also with your estate planning attorney. You want to make sure that stuff is considered and thought about.

regularly, every couple of years or major law [00:19:00] changes or major life changes. That’s when you want to look at it and make sure that your current intentions are the way that they want to be right. And they made the plans and how they’re used still meet your goals. And with that, I’m going to plug again for a financial advisor.

You want to have a financial advisor before you retire. You want to have a financial advisor. When you retire, you want to have a financial advisor. Once you’re retired, you want to have a financial advisor. And the reason why is they’re going to help you maximize your, Assets maximize your income, maximize your growth of your investments, right?

They’re going to direct you in a way that you’re comfortable with regard to how your money’s invested. And so it’s essential to consult with them and have them help you with your accounts. Cause it’s a full time job to follow the stock market. It’s not easy. And that’s their job. Okay. They can provide that professional guidance based on your individual circumstances and ensure that the retirement accounts that you have and your other accounts too.

are integrated properly with your estate plan. Okay. [00:20:00] So plug number two or three for financial advisor guidance on that. So, okay. This brings us to our story time. And here’s the thing, right? Retirement accounts and estate planning is not the sexiest topic. I’m not like, you know, it’s not my favorite topic that we’ve talked about on this podcast.

And there’s, you know, there’s not a lot of examples of, you know, this terrible thing happened because this didn’t work. Right. Or I’ve got this very specific example of this retirement plan. It didn’t get coordinated properly. Like I do for a lot of different other topics, right? Like not having a plan, not doing it right with kids or not omitting people or omitting people.

You know, there’s all kinds of consequences, but for estate plans and retirement accounts, there’s not a lot of like situations that come to me even after 21 plus years of practice. where I said, well, this was a terrible situation. We need to talk about it. So people are aware there’s not a ton of those that I’ve come [00:21:00] across.

So the story today isn’t specific, but it’s common, right? Cause most people that I meet with that are retired or pre retirement, their biggest asset, even bigger than their house in many cases is their retirement account, right? And in Washington, we have a very low estate tax threshold, which is just over 2 million, 2.

1 million.

So that means that you can only pass 2. 1 million and less without estate tax. Anything over that would be subject to estate tax. So, we want to make sure that IRA, which is your biggest asset besides your house in most cases, is dealt with. And so, often times we’ll def set up our plans, right? We’ll create these plans where the estate is set up where the retirement account goes into a specific trust or special type of trust.

That’s specifically designed to hold retirement [00:22:00] accounts. And this trust is usually built into other trusts. Usually they’re irrevocable parts of irrevocable trusts like a bypass trust or a credit shelter trust, or an irrevocable trust that you might set up for your beneficiaries, like your kids, like a dynasty trust, which we’ve mentioned a little bit.

And so we create these internal IRA retirement account. SubT trusts that specifically deal with the iris. And the purpose of them is to make sure that we’re taking advantage of the laws and how much time we can keep these funds in the trust. And there’s, they’re part of the trust, but they’re still maintaining as much as possible the tax deferred nature of the account.

And so we specifically use these trusts to allow for an individual to hold a retirement account in a trust. Still take the RMDs. But the RMDs oftentimes can stay in the irrevocable trust and put into, be put into like a brokerage account or another kinds of account that would allow for that money to remain in [00:23:00] trust, remain tax free as far as estate taxes go, but still be available for the beneficiary for their benefit.

And this can provide significant benefits over other ways, right? Because here’s the problem, specifically when it’s a surviving spouse. If we say, okay, well, I’ve got 1, 000, 000 in IRA, my house is worth 1, 000, 000 and I’ve got a 500, 000 brokerage account or something. So they’ve got a taxable estate, but the IRA is just designated to the surviving spouse.

And the problem with that is, that money is going to be part of the surviving spouse’s taxable estate. Whereas if you name it to a specific trust that can hold that IRA for the surviving spouse’s benefit, that money can be sheltered and not includable in that person’s taxable estate. So there’s things to consider there.

And it takes a little bit of thought, thought and a little bit of nuance to make sure that’s done correctly and for the benefit of the couple or individual who’s doing this estate plan. So that’s the story. That’s [00:24:00] what we’re going with this week. So hopefully it’s something interesting.

So, okay. So last couple of weeks, we’ve, I’ve toyed with this in the news segment or what’s new in estate planning. And here’s the thing, right? Estate planning isn’t a very rapidly changing area of law. At least it’s not fast enough where there’s something brand new every week that I’m going to bring up.

Okay. And so on a weekly podcast finding something novel or interesting about estate planning changes or innovative things within every week’s episode is not going to work. And so I’ve thought that I would mention something good as part of this because I think things, you know, things that are good, things that help us You know, improve our mindset, improve how we view the world, improve how we view ourselves, how we view those around us, how we view people that we might not necessarily agree with or that we might not necessarily associate with very much is important, right?

[00:25:00] So seeing good things. allows us to think good things, right? Seeing things that say, well, that’s good. You know, society is still good despite its flaws, I think is a positive thing. So, so we’re, if there’s not anything interesting in the news of estate planning, I’m going to include something good in this segment.

So this is the something good in the news segment. And I found this, I was looking for an article of just reading through, you know, Google headlines or whatever. And I come across this study. Watching sports can be good for you. This is something that’s interesting to me because I like sports, and I know a lot of people like sports.

This is from the Good News Network, and it says this. Beyond simply providing entertainment and relaxation, watching sports fosters community and belonging. Which benefits both individuals and their society. A team of Japanese researchers used a multi method approach that found that sports viewing activates brain reward circuits leading to improved well being.

This [00:26:00] is especially true when watching popular sports, and this is in Japan, so the popular sports in Japan are baseball and soccer. Here, it would probably be baseball, football, basketball? That’s the biggest, most popular sports? Maybe hockey? Depending on what region of the country you’re in. Maybe soccer, depending on what region of the country you’re in.

So watching popular sports can notably boost both physical and mental wellbeing, but this is less true with sports that are, have lower popularity, like golf, golf is a very popular sport, but it’s, a segment of society that likes to watch golf or play golf. It’s not the vast majority of us who almost everybody watches football or watches baseball once in a while.

It seems like we always love football around here. Nowadays, football is overtaken. Baseball is the most popular sport. Anyway, Associate Professor Sato from the Faculty of the Sports Sciences at Waseda University. The team found that watching sport, particularly in large crowds, goes beyond entertainment by fostering a sense of community and personal belonging.

This sense of connection not only [00:27:00] makes us feel good, but also benefits society by improving health, enhancing productivity, and reducing crime, said Professor Sato. The results showed That watching sports triggered activation in the brain’s reward circuits, indicative of feelings of happiness and pleasure.

So that’s important. So, watching sports increases those reward giving parts of our brain. It also says, analysis also revealed that people who reported watching sports more frequently exhibited greater gray matter volume in regions associated with reward circuits, suggesting that regular sports viewing may gradually induce changes in brain structures.

Which is good. We want our brains to be better. Both subjective and objective measures of well being were found to be positively influenced by engaging in sports viewing. Thank you, Professor Sada. By inducing structural changes in the brain’s reward system over time, it fosters long term benefits for individuals.

For those seeking to enhance their overall well being, regularly watching [00:28:00] sports, particularly popular ones like baseball and soccer, can serve as an effective remedy. So maybe it’s a depression thing too, it helps you with depression or melancholy feelings, things like that. Professor Sato says the findings, his findings which were published in the Sports Management Review, have profound implications for not only sports fans but in a larger general population, irrespective of their relationships to sports consumption.

So the more people that watch sports or view sports, the happier the general public is because those sports viewers are sort of lifting others. That’s what I’m interpreting as, which is super interesting. I’m a fan of watching sports. I’m a big fan of sports of all kinds. I watch all the sports. I even watch golf, but only really on the majors.

I’m going to tell you that, and that’s probably true for most people anyway. So, but sports people. Those sports fanatics who are married to non sports people or with non sports people, I say this, you’re welcome. So when someone, you’re watching the game or, you know, you want to go to the [00:29:00] baseball game or whatever in the summer, or Seahawks or whatever, right?

Just tell them the health benefits and that might get you in, okay? Honey, I need to watch this game.

So if you’re at wanting to go to the baseball game in the summer, if you’re wanting to go watch the football game or soccer, whatever it is, any kind of sport event. And your partner is like, well, you know, we really don’t want to go to that. I don’t really want to go to that game or, you know, can we just relax and tell them about the health benefits of going to that game, watching that game, even watching it on TV, I think helps.

And sports is one of those things where regardless of our political views and our social views, you know, It’s a place where people have different socioeconomic circumstances, different political circumstances, religious circumstances, all those things can sort of get together and back one team, right? So it really is good for us as a society.[00:30:00]

If we’re trying to be better, you know, we’ve got a lot of division these days, unfortunately. And so hopefully that sport You know, viewing can maybe help with that. And the camaraderie that you get, you know, the game and you high five some guy that you don’t know behind you. Cause the guy hit a home run or whatever, right.

Or scored a touchdown or a goal or whatever sport you like, or I don’t know. I don’t know what you do with the golf tournaments. Maybe the hole in one might get you there or birdie. I don’t know for your great player, if he wins. Anyway, so that’s my thoughts on that. Anyway, I think it’s good. So something good will come.

If we don’t have a great estate planning story, we’ll talk about something good instead. And that’s it. That’s it for today’s episode. Thanks for listening to today’s episode of Legacy Talk. If you liked today’s episode and would like to learn more, please like and subscribe for more great content. I’ve been your host, James Jones.

To your legacy.

Narrator: Thank you for listening to the Legacy Talk podcast by attorney James [00:31:00] A. Jones. If you found today’s episode helpful, we ask that you like and follow us on all major platforms so you don’t miss out on the latest episode. If you have questions for Attorney Jones, reach out at info@joneslegacylaw.com or visit our website at JonesLegacyLaw.com

join us again next week for another episode of the Legacy Talk podcast.