Planning for Retirement Assets in Your Estate Plan

To be tax efficient, which types of assets should you live off of in retirement, and which should you plan on passing down? There’s a bit of art to the equation, and how you plan can make a big difference to your beneficiaries.

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Whether you are already retired or are thinking about it, establishing a plan to coordinate both anticipated retirement goals and a plan for legacy assets is critical. Depending on their intended purpose, your assets may need to be managed distinctly differently to allow for a cohesive, successful outcome.

Where to Begin?

When developing (or making changes to) your estate plan for retirement assets, it’s important to first identify your goals: Do you want to leave the bulk of your assets to your kids? Do you have big plans to support charitable causes with your estate?

To achieve your goals in the best way possible, you’ll need to get familiar with how your assets will flow, both for retirement and then to your heirs.

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Having your accounts titled and earmarked to pass appropriately may enable an efficient tax result, securing a successful retirement and transfer to the ultimate recipients. You can avert problems by checking beneficiary designations, titling, and other legal documents, to align your assets according to your plans. Finally, adjust your plan when your intentions, beneficiaries’ circumstances and tax rules change to optimize your results.

Plan for Both Core Assets and Excess Capital

If you’re retired or getting ready to retire, you’ll be advised to review your investments and income. Stable sources of income, such as pensions, annuities and Social Security, may be supplemented by distributions from taxable investments. Required minimum distributions from tax-deferred traditional IRAs and other qualified plans beginning at age 72 (for those turning age 70½ in 2020 and thereafter) may also be part of the mix.

Your core capital should include resources necessary to cover anticipated annual expenses, along with sufficient reserves to address unanticipated medical, long-term care or other episodic expenses. Those with surplus retirement assets should also consider planning for excess capital intended for their estate’s heirs.

Optimize Legacy Planning for Retirement Assets

Once you’ve identified the core capital you need to fund your day-to-day expenses, it may be advantageous to segregate the excess capital reserved for wealth transfer. If not earmarked, excess capital may not be managed effectively for tax or investment purposes over the long term.

Establish a Plan for Your Taxable Assets

It may be surprising to know that children or other individuals can be better off inheriting highly appreciated taxable investment accounts rather than a traditional IRA. That’s because these types of accounts currently qualify for a step-up in cost basis. The step-up enables a beneficiary to sell the appreciated assets they receive as an inheritance without incurring capital gains taxes on the appreciation.

For example, an heir receiving 1,000 shares of a stock, with a $20 per share cost basis that are valued at $120 per share at the owner’s death would pay no capital gains taxes on the gain of $100 per share. The $100,000 gain in total would have been taxed if sold during life of retiree. Of course, the post-death appreciation, if any, on such inherited assets would be subject to capital gains taxes.

Be aware, however, that this step-up in basis benefit may change in the future. The STEP Act proposes eliminating this tax break for gains of $1 million or more ($2 million or more for a married couple).

Plan Separately for IRA and Tax-Deferred Assets

On the other hand, traditional IRAs and other qualified assets, considered “income in respect of a decedent,” do not receive a step-up in basis. Those assets will generally be subject to ordinary income tax rates. Therefore, a $100,000 IRA passing to a child will be taxed at the child’s ordinary income tax rate when withdrawn. A child in a 37% marginal income tax bracket who withdraws the entire account can subject the distribution to taxes at 37%.

Often, retirees strive to preserve traditional IRAs and qualified accounts while spending taxable accounts to take advantage of lower capital gains taxes as they take distributions from those taxable accounts. Though deferring those taxes is often beneficial during life, it can set heirs up for a big tax bill. Instead, once you determine that your traditional IRA or qualified plan assets aren’t necessary to meet your retirement goals — and if they are intended to be inherited after you pass — it may be better to convert even a portion of those retirement accounts to a Roth IRA and pay some taxes now, enabling the assets to grow tax-free rather than tax-deferred.

Once converted, taxable distributions from Roth IRAs aren’t required during the lifetime of a retirement plan owner, or for a spouse as beneficiary. A Roth IRA can grow tax-free over joint lives of the owner and spouse and be distributed tax-free after an additional 10 years or more for certain individuals who qualify as eligible designated beneficiaries under the SECURE Act. Heirs may be better off, especially those ultimately inheriting large accounts from retirees with excess capital who convert to a Roth IRA early enough to allow the assets to grow before their heirs inherit them. One stipulation is that to work most efficiently, anyone considering a Roth conversion should have other assets available for retirement AND to pay income taxes due from the conversion.

Segregate Assets Earmarked for Charity

While a Roth IRA strategy can work when individuals inherit retirement assets, when someone has a charitable intent, the charity of their choice can benefit greatly when it is named as the beneficiary of a traditional IRA/retirement plan account. When the owner names a charity as beneficiary, the charity receives the assets tax-free. Moreover, the account owner’s estate may be eligible for an estate deduction for federal and state estate taxes.

Whether your resources meet or surpass your retirement spending goals, a targeted plan for those legacy assets in your estate should not be overlooked. Coordinating all of your resources in meeting retirement spending needs, while managing them effectively to control the tax consequences, can ultimately enhance both retirement and estate outcomes.


The views expressed within this article are those of the author only and not those of BNY Mellon or any of its subsidiaries or affiliates. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.


This material is provided for illustrative/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Effort has been made to ensure that the material presented herein is accurate at the time of publication. However, this material is not intended to be a full and exhaustive explanation of the law in any area or of all of the tax, investment or financial options available. The information discussed herein may not be applicable to or appropriate for every investor and should be used only after consultation with professionals who have reviewed your specific situation.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Kathleen A. Stewart, AIF®
Senior Wealth Strategist, BNY Mellon Wealth Management

As a Senior Wealth Strategist with BNY Mellon Wealth Management, Kathleen Stewart works closely with wealthy families and their advisers to provide comprehensive wealth planning services.  Kathleen focuses on complex financial and estate planning issues impacting wealthy families, key corporate executives and business owners.