Choosing the Beneficiary: Should a Child or Grandchild Inherit the Retirement Account?

The decision of whether a child or a grandchild should inherit a retirement account depends on your specific circumstances, goals, and priorities. Here are some factors to consider when making this decision:

Age and financial needs: If your child or grandchild is older and closer to retirement age, inheriting a retirement account could provide immediate financial support. They may have a greater need for the funds to cover living expenses, healthcare costs, or other financial obligations. On the other hand, if your child or grandchild is younger and has more time before retirement, inheriting a retirement account could serve as a valuable long-term investment and wealth-building opportunity.

Tax implications: Inherited retirement accounts are subject to specific tax rules. For traditional retirement accounts, such as traditional IRAs or 401(k)s, distributions are generally subject to income tax. If your child or grandchild is in a higher tax bracket, they may face significant tax liabilities upon inheriting the account. In contrast, Roth IRAs are funded with after-tax dollars, and qualified distributions are generally tax-free. Inheriting a Roth IRA can provide tax advantages to your child or grandchild.

Stretch IRA strategy: The “stretch IRA” strategy allows beneficiaries to stretch the required minimum distributions (RMDs) from an inherited retirement account over their life expectancy. This can provide a long-term tax advantage by minimizing the annual tax burden and potentially allowing the account to continue growing tax-deferred. However, recent changes to the tax law have limited the stretch IRA strategy for non-spouse beneficiaries. It’s important to consider the impact of these changes on the inheritance.

Other financial resources: Consider the financial situation of your child or grandchild outside of the retirement account. If they already have significant financial resources or retirement savings, inheriting a retirement account may not be as crucial to their overall financial well-being. In such cases, you may want to prioritize other beneficiaries who may have a greater need for the retirement account assets.

Estate planning goals: Your overall estate planning goals should also be taken into account. If your primary objective is to provide financial support for your immediate descendants, such as your children, it may be more appropriate for them to inherit the retirement account directly. On the other hand, if you want to extend your legacy and provide for future generations, you may consider designating a grandchild as the beneficiary.

Ultimately, there is no one-size-fits-all answer to whether a child or a grandchild should inherit a retirement account. Linda Solash-Reed, P.L. can help you consider the specific needs and goals of your potential beneficiaries to make an informed decision. Call our office at 321-804-2915 or fill out our contact form and we will be in touch to schedule a meeting.