Incorporating Retirement Assets Into Your Estate Plan

December 6, 2023

The Setting Every Community Up for Retirement Act ( also known as the Secure Act) became law on December 20, 2019, and went into effect in 2020. More recently, Congress enacted the SECURE 2.0 Act, with some of the provisions having already taken effect as of January 1, 2023. The SECURE Act and SECURE 2.0 Act (the “Acts”) made mostly favorable changes to retirement plans such as IRAs, 401(k)s, and 529 Education Saving Plans. These laws were intended to improve access to tax-advantage retirement accounts and prevent older Americans from outliving their retirement funds. Even if most of your wealth doesn’t come from employer sponsored or individual retirement accounts, you should understand how the changes potentially affect the funds you contributed to these accounts. A comprehensive estate plan should maximize the tax-deferred benefits of these accounts while supporting your overall legacy goals.

Qualified Retirement Plans

Retirement plans are divided into two broad categories of plans: defined benefit plans and defined contribution plans. This article focuses on defined contribution plans, such as 401(k) plans and 403(b) plans, and traditional individual retirement accounts (“IRAs”). Defined contribution plans are funded by the employee/participant with contributions taken directly from the employee’s paychecks. Sometimes an employer will match a portion of the employee’s contributions. Defined contribution plans do not guarantee a specific amount of benefit; the ultimate payout depends on the underlying performance of the plan’s investments.

The greatest advantage of these plans over other investments is their preferential tax treatment. The money contributed by a participant to a qualified retirement plan or IRA is generally not subject to income tax when it is earned. This deferral of income tax allows both your money and Uncle Sam’s money to grow through investment. However, distributions from the retirement account will ultimately be subject to income tax in the year they are received by the owner or beneficiary of the account.1

For 2023, employees can contribute up to $22,500 per year to a 401(k) plan. In contrast, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can’t be more than $6,500 ($7,500 if you’re age 50 or older). Prior to the SECURE Act, you couldn’t make contributions to an IRAs after you turned 70 ½ years old. The SECURE Act removed this age restriction and now you can contribute to these IRAs as long as you have compensation, which generally means earned income from wages or self-employment. If your plan allows it, individual participants who are 50 years of age or older can make “catch up” contributions above the normal statutory limits for both qualified retirement plans and IRAs. These changes reflect the reality that people are living longer and working later in the life.

Required Minimum Distributions (RMDS)

Tax deferred savings plans like 401(k)s and IRAs were created to incentivize saving for retirement, they were never intended to be vehicles to transfer wealth from one generation to the next. In order to prevent this practice, Congress enacted a series of rules known as the Required Minimum Distribution (“RMD”) rules to ensure that such funds are used for their intended purposes. Under the old rules, you had to start withdrawing a minimum amount of money from your retirement account each year after attaining age 70 ½. The SECURE 2.0 Act raised the RMD age to 73 beginning on January 1, 2023, and will increase this age to 75 beginning on January 1, 2033. RMDs rules are highly complex and the amount and timing of RMDs will vary depending on the account balance, when the participant passes away, and who is listed as the beneficiary on the account, among other things.

Partial Elimination of Stretch IRAS

Prior to 2020, most beneficiaries who inherited tax-deferred retirement accounts could stretch distributions over their life or life expectancy. This allowed the contributed funds to continue investment and growth on tax-deferred savings over a longer period. The Acts radically changed RMD rules (and not necessarily for the better). Except for certain Eligible Designated Beneficiaries, funds must be distributed to a beneficiary within five or ten years of the plan participant’s death.

Your beneficiary’s RMD will depend on whether the beneficiary is an Eligible Designated Beneficiary (“EDB”), Designated Beneficiary (“DB”), or a Non-Designated Beneficiary (”Non­DB”). EBDs can generally elect to stretch out distributions over their life expectancy and include your surviving spouse, disabled or chronically ill child, and individuals not more than 10 years younger than plan participant.

A Designated Beneficiary is any individual designated as a beneficiary by the plan participant. In other words, an actual person that will pass away some day. A DB must receive full distribution of the retirement account within 10 years of the plan participant’s death. In general, no distributions are required until the tenth year of the RMD period; however, annual distributions may be required if the plan participant died after his or her RMD period commenced.

A Non-DB is simply a beneficiary who does not otherwise qualify as a EDB or DB, such as your estate, non-qualified trusts, charitable organizations, etc. If the plan participant dies before the commencement of his or her RMDs, the Non-DB must receive all benefits within five years of the participant’s death. If the participant passes away after RMDs have commenced, the Non-DB may continue receiving RMDs over the life expectancy of the participant as if the participant had not died. Non-DBs will receive income distributions over a shorter period of time and likely have to pay higher income taxes.

Despite the consequences described above, it may still make sense to designate a trust as a beneficiary on your retirement accounts. Good planning must consider your legacy goals and the needs and limitations of your beneficiaries. Protecting assets from creditor’s claims is always an important consideration. And sometimes beneficiaries cannot receive direct control over an asset because of disability, immaturity, or drug use concerns.

Certain qualified trusts known as “see-through” trusts can be treated as an EDB or DB. By carefully drafting the terms of the trust, the IRS will look through the trust and treat the trust beneficiaries as having been designated direct beneficiaries on the retirement account. A detailed discussion of these types of trusts is beyond the scope of this article. All things being equal, it is better to list individual persons as beneficiaries on qualified retirement accounts and IRAs.


Retirement benefits are an important consideration in any estate plan. A proper estate plan should consider the type of plan holding the assets, the required minimum distributions under the plan, beneficiary designations, and your legacy goals. And if you haven’t participated in a qualified retirement plan or IRA, it might be time to reconsider—it is never too late to start saving for retirement.

This article is intended to provide a general overview of estate planning for retirement assets. There are many exceptions to the rules described above and new regulations are being proposed all the time. Consequently, it is important periodically review your retirement accounts with the plan administrator and your estate planning attorney to ensure the current plan is consistent with your long-term goals.

1. Roth IRAs and Roth 401(k) accounts are funded with post-tax earnings and may be withdrawn without incurring income tax.

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