Making Deferred Compensation Work for your Estate Planning Goals

Qualified plans  such as IRAs, 401(k)s, 403(b)s and other deferred compensation are excellent ways to help reach your estate planning goals and ensure your wealth is not depleted by excessive taxes and assisted living costs. IRAs in particular help achieve both of these goals because they are not taxed and if utilized properly, will not count against you when applying for Medicaid to pay for nursing home care.


For estate planning purposes, qualified plans are considered those which individuals make contributions to while working and begin making at least the required minimum distribution (RMD) at 70-years old. IRAs and qualified plans help encourage people to save early and often for their retirements by offering these tax-free incentives and should be taken full advantage of to ensure we can live our our retirement in comfort.


If an individual is already living in a nursing home and applying for Medicaid, the principal amount of the IRA is protected when calculating one’s assets to determine whether or not he or she qualifies for Medicaid as long as that person is taking the RMD. For a Roth IRA, it is not necessary to take the RMD if distributions are being taken.


IRAs are also an excellent way to pass on wealth to beneficiaries without having to pass assets through probate court, which can be an expensive and lengthy process depending on the size of the estate. Absent the creation of a trust, assets like homes, small businesses, and real estate will need to go through probate court but with an IRA, beneficiaries can be named to inherit the benefits immediately upon death.


Typically, an IRA will name a spouse as the primary beneficiary (called spousal rollover) which allows the spouse to treat the IRA as his or her own, letting the principal grow, and take distributions immediately, or wait until age 70 for the RMD. IRAs also allow individuals to name secondary or contingent beneficiaries, such as children. However, these secondary beneficiaries cannot treat the IRA as their own by making contributions or avoiding taxes.


Another benefit of an IRA is allowing the benefits to “stretch” the value over time. What this means is that the principal of the IRA can grow tax-free over time. Secondary beneficiaries can set up their own inheritance trusts with an IRA, which allows the benefits to be passed on to multiple generations.


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