WiserAdvisor – Blog

Main Menu

  • Main
  • Financial Advisor Guide
  • Financial Planning
  • Retirement Planning
  • Education Planning
  • Investment Management
  • More
    • Personal Finance
    • Estate Planning
logo
I Want to Take Charge.
HELP ME FIND AND COMPARE TOP VETTED FINANCIAL ADVISORS IN MY AREA.

FINRA/SEC Registered Advisors

  Your Information is Safe and Secure

WiserAdvisor – Blog

  • Main
  • Financial Advisor Guide
  • Financial Planning
  • Retirement Planning
  • Education Planning
  • Investment Management
  • More
    • Personal Finance
    • Estate Planning
Estate Planning
Home›Estate Planning›Three Estate Planning Mistakes Investors Make with IRAs and 401(k)s

Three Estate Planning Mistakes Investors Make with IRAs and 401(k)s

By WiserAdvisor Insights
March 10, 2020
1256
0
Share:
Estate-Planning

People make savings and investments keeping in mind the needs of their families. Most of the time, one generation is diligent and resourceful to turn their savings into heritage for the upcoming generations. There are several instances where people are still enjoying the earnings from their forefathers’ investments. 

However, as someone looking to build a pool of wealth for your loved ones, only saving money is not enough. There are several other aspects related to money that require equal consideration, one of which is taxation. Another important factor that needs to be accounted for while dealing with wealth is to decide your beneficiaries in case of your demise. 

Roth IRAs (Individual Retirement Account) and 401(K) investments are quite popular among investors who wish to leave an inheritance to their heirs. This is so because these accounts offer tax benefits and do not account for RMDs or required minimum distributions immediately. Generally, the contributions made under a Roth IRA are tax adjusted and once you have held a Roth IRA for at least 5 years and are at the age of 59.5, you can take tax-free distributions from that account. However, when you pass on this heritage to your heirs, they may or may not be able to enjoy the tax-free status of this account. This entirely depends on how you manage your Roth IRA. 

Here are three estate planning mistakes that you must avoid while dealing with your Roth IRA and 401(k) account:

Not naming a beneficiary

The biggest and most common mistake that investors commit is not naming the beneficiary of their estate. In most IRAs, of the several clauses, this is generally found empty. One of the main reasons for this mistake is that people open their IRAs quite early in life (usually before getting married and having children) and then forget about it. As time passes, the thought of designating a beneficiary for their IRA or for that matter all other savings and investment accounts, simply vanishes from their mind. 

Not naming a beneficiary can prove to be a costly affair since the decision and inheritance depends upon your will. If you do not have a will, your heirs will need to hire a lawyer and run around courts to get the rightful ownership of their legacy. This will prove to be expensive in terms of time, money, and effort.

It is always advisable to name a beneficiary as and when you open your IRA, whether it is your parents or siblings. As your family grows or evolves, you must remember to make the desired changes.  Doing so will ensure that your spouse and children get the intended benefits without any hassles and complexities. 

Committing a wrong beneficiary selection

The second common mistake people make is naming the wrong beneficiary when rushing to do so. While most couples practice naming each other as beneficiaries in their IRAs and 401(K)s, this may prove to be a wrong decision in the case of Roth IRAs. 

A huge advantage in the case of Roth IRAs is that if you name a younger beneficiary, like your children, they will be able to extend the distribution period for 10 years under the SECURE Act. In certain cases where the beneficiary is either chronically ill, disabled, under the age of 18, or is no more than 10 years younger to the original owner, the limit can be stretched further and be extended throughout their lifetime.

Under the Roth IRA accounts, the distributions made are tax-free in nature and even the wealth appreciation is not taxed upon the death of the original owner. However, you need to be careful about other taxation rules that may apply to younger beneficiaries inheriting the legacy. Consulting an expert in such cases could be helpful. 

Avoiding RMDs

RMDs are required minimum distributions that need to be taken at regular intervals as a general rule. However, when the original account owner passes away, heirs generally neglect taking these distributions. If the beneficiary is not the spouse of the original owner, then they need to start taking out RMDs with effect from 31st December of the next year in which their original owner died.  

Upon failing to take out the RMD at regular intervals, the beneficiaries may be forced to withdraw the complete amount within a span of 5 years. This span otherwise could be extended to 10 years if the beneficiary maintains discipline in taking out the RMDs. 

Also, since the beneficiaries would have violated the RMD rules, they will be liable to pay taxes and penalties accounting for a considerable amount. 

To sum it up

Dealing with money requires due diligence and extra caution, whether it is for your current use or for an attempt to leave a legacy for your future generations. A sophisticated financial system can account for ease and transparency in monetary matters but can also be highly penalizing if not dealt with carefully. Remember that when you are planning to leave a fortune for your heirs, money is not the only thing you need to think of. There are several other important aspects that need attention and planning. 

If you think that you are making any of these mistakes with your IRA and 401(k) account, you can consult financial advisors and work towards rectifying them.

Tags#401k#IRABeneficiaryEstate PlanningRMDTrustWill
Previous Article

Four Indicators for Tracking Your Financial Goals

Next Article

Picking the Right Investment in Your 50s

0
Shares
  • 0
  • +
  • 0
  • 0
  • 0
  • 0
WiserAdvisor Insights

WiserAdvisor Insights

A team of dedicated writers, editors and finance specialists sharing their insights, expertise and industry knowledge to help individuals live their best financial life and reach their personal financial goals. We believe that there is no place for fear in anyone's financial future and that each individual should have easy access to credible financial advice.

Related articles More from author

  • Covid-19-Crisis-Financial-Plan
    Retirement Planning

    Do You Need to Rejig Your Financial Plan Because of the COVID-19 Crisis?

    July 28, 2020
    By WiserAdvisor Insights
  • Estate Planning for Single Parents
    Estate Planning

    How is Estate Planning Different for Single Parents?

    May 28, 2020
    By WiserAdvisor Insights
  • Retirement-Savings
    Retirement Planning

    Are Your Average Retirement Savings Normal?

    August 17, 2021
    By WiserAdvisor Insights
  • Retirement Planning

    How to Get Entirely Tax-Free Retirement Income

    August 5, 2019
    By WiserAdvisor Insights
  • Retirements
    Retirement Planning

    Comparison of The Two Retirements: FIRE and Traditional Retirement

    March 27, 2020
    By WiserAdvisor Insights
  • Education Tax Credit
    Education Planning

    6 Important Pointers to Know About Education Tax Credits

    January 20, 2021
    By WiserAdvisor Insights

You might be interested

  • Protect Your Retirement Assets
    Retirement

    7 Steps To Protect Your Retirement Assets and Income

  • Estate-Planning
    Estate Planning

    Three Estate Planning Documents Everyone Needs

  • Financial-Plan
    Financial Planning

    6 Reasons Why Frugality Is the Key to Making Financial Plans Successful

Don't miss out! Get our Helpful Financial Tips Newsletter

  • Popular Posts

  • The benefits of working with a financial advisor - WA

    The benefits of working with a Financial Advisor

    By WiserAdvisor Insights
    July 16, 2019
  • Financial-Professional

    How to prepare for a meeting with your Financial Advisor

    By WiserAdvisor Insights
    July 8, 2019
  • Do's & Don't investment portfolio

    The Dos and Don’ts to Protect your Investment Portfolio in a Bear Market Amid The ...

    By WiserAdvisor Insights
    April 22, 2020
  • retirement-accounts

    Choosing the Best Retirement Accounts

    By WiserAdvisor Insights
    July 8, 2019
  • Retirement-Planning

    Retirement Planning checklist

    By WiserAdvisor Insights
    July 8, 2019
  • Why investing for goals is the right way of investing

    Why Investing for goals is the right way of Investing?

    By WiserAdvisor Insights
    July 16, 2019
  • Portfolio diversification

    5 Dangers of Over-Diversifying your Portfolio

    By WiserAdvisor Insights
    July 26, 2019
  • Financial Planning for couple

    The Complete Guide on Financial Planning for Couples

    By WiserAdvisor Insights
    August 1, 2019

Categories

  • Business Finance (2)
  • Education Planning (29)
  • Estate Planning (20)
  • Financial Advisor (1)
  • Financial Advisor Guide (30)
  • Financial Planning (121)
  • Investment Management (65)
  • Personal Finance (10)
  • Portfolio Management (1)
  • Retirement (16)
  • Retirement Healthcare (1)
  • Retirement Planning (79)
  • Retirement Plans (1)
  • Uncategorized (2)

The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.

WiserAdvisor is America’s oldest and largest independent network of screened financial advisors. We make it easy and convenient for consumers to find and connect with advisors in their area. We have successfully helped over 100,000+ individuals find their best financial advisor since 1998 with no match fees, no commitments, no obligation, and complete confidentiality. WiserAdvisor has been featured in The Washington Post, The Washington Journal, ABC, CBS, Yahoo and has been seen in numerous other leading financial news and information websites.

Follow Us

  • Recent

  • Popular

  • High Net Worth Wealth Management

    7 Wealth Strategies For High-Net-Worth Individuals In 2023

    By WiserAdvisor Insights
    January 27, 2023
  • Financial New Year's Resolutions

    6 Financial New Year’s Resolutions for 2023

    By WiserAdvisor Insights
    January 11, 2023
  • Future Investment Trends 2023

    Key Trends and Concerns for Investors in 2023

    By WiserAdvisor Insights
    January 9, 2023
  • The benefits of working with a financial advisor - WA

    The benefits of working with a Financial Advisor

    By WiserAdvisor Insights
    July 16, 2019
  • Financial-Professional

    How to prepare for a meeting with your Financial Advisor

    By WiserAdvisor Insights
    July 8, 2019
  • Do's & Don't investment portfolio

    The Dos and Don’ts to Protect your Investment Portfolio in a Bear Market Amid The ...

    By WiserAdvisor Insights
    April 22, 2020

Contact Us

Corporate Headquarters

12150 Monument Drive, Suite 700
Fairfax, VA, 22033

Business Hours

8:30 AM – 5:00 PM EST (Monday – Friday)

Email Address

wa.assistance@wiseradvisor.com

Phone Number

(703) 651-2060

Fax Number

(703) 259-4487

  • Privacy Policy
  • Terms & Conditions
© Copyright 2022 WiserAdvisor.com. All Rights Reserved.