Patty Manko Sat, Jan 28, 2017 @ 08:00 AM 6 min read

January To- Do: Check Your Retirement Account Beneficiaries

The Special Needs Financial Planning Team  Cynthia Haddad, CFP | John  Nadworny, CFP | Alexandria Nadworny, CFP  We are committed to offering educational workshops to organizations and parent  groups.  Please call Alex or click here to attend a workshop or discuss a presentation  to your group.Workshops Calendar

box_with_check.pngRetirement accounts like 401(k)s and IRAs represent a large portion of most people's savings. While these plans encourage saving by offering significant tax rewards, it is important to know and understand the possible consequences when a beneficiary or contingent beneficiary is a person with special needs and plan accordingly.

Most retirement plans require some form of distribution from the account once an account owner dies. Upon the account owner's death, the proceeds are distributed according to the beneficiaries listed on each retirement account and not your estate plan. Generally speaking, if you are married, your spouse is usually listed as the primary beneficiary. At the owner's death, the spouse will be able to transfer the assets into a spousal IRA rollover. This will enable the spouse to defer the taxes until the funds are withdrawn from the account.

If you are not married and your intent is for an individual with a disability to receive any portion of the IRA, you should consider having those proceeds paid to a trust that has special needs provisions. Please note that the language in the special needs trust must accommodate retirement plan distributions properly.  It is critical to work with a disability law attorney who can make sure your documents are up to date and protect your child’s eligibility for government benefits.

Planning tip: 

If a special needs trust is used as the beneficiary of a retirement plan account, the income earned in the trust will be taxed to the trust, usually at a higher tax bracket than an individual tax bracket. The proceeds from a Roth IRA are distributed tax free upon death of the owner. If an owner has a Roth IRA in addition to other retirement accounts, it may be advantageous to have the special needs trust named as beneficiary of the Roth IRA and the other children named as beneficiaries of the other IRA and retirement plan assets.

It is not recommended to have an individual with disabilities named individually as the beneficiary of the traditional IRA or Roth IRA*, because an account balance greater than or equal to $2,000 will disqualify him or her for government benefits. Instead, if the owner wants the value of all or a portion of the IRA to be received by a person with disabilities, that person's special needs trust should be named as one of the beneficiaries.

Here's an Example:

If you have more than one child and you intend to split your retirement account between all the children, including your child with special needs, you should direct his or her share in the beneficiary designation to the special needs trust. An example would be to have Adam Miller name his wife, Justine, as his primary beneficiary. He would then name two of his children, Kyle and Alyssa, as contingent beneficiaries, each to receive 33% of the retirement account; and he would name the special needs trust created for his third child, Alexia, as a third contingent beneficiary to receive the remaining 34% of the retirement account. Adam would list the special needs trust for Alexia on his beneficiary designation form by including the proper registration, "The Alexia Miller Special Needs Trust Dated January 1, 2007."

Questions? Talk with us.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual, nor intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Tax laws and provisions are subject to change

* Roth RIA are distributed upon death of the owner tax free provided the account has been open for 5 years as of the date of death. Otherwise, taxes may apply to earnings distributed.