When you think of "estate planning" you probably imagine writing a will and giving instructions about who gets the house, the car, and grandmaís jewelry. But an important asset for many people is their IRA and employer retirement plan. Retirement plans are generally passed to beneficiaries directly, and are not disposed of in a will. Talk to your lawyer abut your arrangements for your nest egg Ė they should be coordinated with your overall estate plan and with your will or trust.

Traditional IRAs

A Traditional IRA is a retirement plan for individual investors. You can open one if the funds you contribute come from taxable earned compensation made during the year of the contribution. The advantage of IRAs is that your contributions are not taxed at the time you invest or annually, but only at the time of withdrawal. At that point youíll pay income tax on whatever you withdraw, but presumably at a lower rate because your income will be less at retirement. These rules mean that you invest every cent of what you put into the IRA, which can add up to a lot of money over 30 years.

You must start making withdrawals after you reach age 701/2. You can name someone as the beneficiary designation form the account custodian gives you when you open an IRA. The beneficiary will inherit the balance of the account on your death. You donít need to mention the IRA in your will or living trust- the beneficiary form is the only thing youíll need to sign. And donít worry, you can change your beneficiary at any time. Itís your money after all.

When the beneficiary receives the funds, he or she has several options. If your spouse is the beneficiary, he or she is allowed to roll over your retirement plan into his or her own IRA. No other beneficiary has this option, not even your children.

All beneficiaries have the option of withdrawing all the money from the IRA immediately, although if they do this they will have to pay income tax on the money they receive with careful planning, however, your beneficiary may be able to spread distributions out over many years.

Itís important to remember when youíre planning your estate that your IRA passes to beneficiaries outside your will, and does not go through probate. However, it is not an ideal vehicle if your primary aim is to pass money to beneficiaries, because the compulsory withdrawals of funds means that the money will be depleted at your death, unless you die earlier than the actuarial tables suggest. If you want to build up your estate, pass money to beneficiaries, and avoid probate, a much better option is the Roth IRA.

Roth IRAs

Roth IRAs do not offer a tax deduction for contributions, but do provide tax-free withdrawals. In addition, they do not mandate compulsory withdrawals after you turn 701/2. For these reasons, Roth IRAs are an appropriate vehicle for people who want to build their estate and avoid probate after death.

You can contribute up to $3000 per year to a Roth IRA (more if youíre over 50) and let the income accumulate, tax-free. After your death, the money will go to whomever you named as the beneficiary. The beneficiary will simply need to show a certified copy of the death certificate to claim the funds, quickly and without going through probate.

Employer Retirement Plans

Most of us are entitled to retirement benefits from an employer. One popular option is a 401(k) plan, which allows you to defer part of your salary in to a retirement fund, so that you can save for retirement while simultaneously reducing your income tax.

Typically, an employer retirement plan will pay benefits to beneficiaries when you die. There are all kinds of rules that may attach to employee retirement funds, including stipulations that benefits be aid to beneficiaries in the form of a survivor annuity. A lump sum distribution may only be available if you file a waiver before you die.

In most cases, the law question portion of these retirement benefits be paid to your spouse, who may roll the money into his or her own retirement plan. Your spouse may waive the right to receive a portion of your retirement benefits only by giving a properly witnessed, signed consent. Why would your spouse waive the right? There are several reasons. Your spouse might not wish to pay income tax on the distributions from the plan, or perhaps the money might be better used by another beneficiary. If your spouse does not waive the right, then your plan should allow you to name some other beneficiary, such as a child or a trust.

Be Clear About Your Beneficiaries

It might seem pretty easy to nominate beneficiaries to these retirement vehicles, but life has a way of making things difficult. Remember, the bank or plan will do what the form tells them to do, so itís up to you to make sure that the form reflects your current intentions. If you get divorced, for example, youíve got to remember to update your IRA beneficiary form, so that your ex-spouse is no longer listed as beneficiary.

Or what if your wishes are complicated? Say you want to leave your IRA account to your son and daughter, with the intention that your daughterís children share any money left over when your daughter dies? This may not be standard option in the forms offered by banks and brokers. If your bank or broker allows it, you should attach an additional beneficiary designation to the printed form provided. In this document, you can provide more detailed distribution planning. However, banks and retirement funds arenít in the business of settling your estate and there are limits to what you can ask them to do through beneficiary designations.


The best way to undertake complex planning, make your wishes clear, establish a mechanism for carrying them out, and save time and heartache for your relatives down the line, is to name a trust as the beneficiary of your 401(k), IRA and insurance policies and other accounts. Then the money will go into the trust after your death, and will be distributed to beneficiaries as directed by the terms of the trust. This means that you can be much more specific about where the money goes Ė if you like you can leave 10 percent to the ASPCA, 30 percent to your brother, and the rest to your daughter, with any unexpended funds to go to the Cancer Research Society after her death.

Other Issues

Beneficiary designations are key components of many other kinds of plans, including annuities, Keogh Plans, and a wide variety of retirement plans available to business owners. Each of these may have special rules, and all should carefully coordinated with the rest of your estate plan.

Your lawyer may also be able to help advise you and your beneficiaries on their options for receiving the bequest (lump sum distribution, monthly payout, etc.); the interface between your decision about who to name as beneficiaries and your family situation, particularly in the case of blended families or divorce or separation; naming charities as beneficiaries; and how to handle contingent beneficiaries (those who you would like to receive benefits in case one of your primary beneficiaries dies).


In 2001, Congress increased the maximum regular contribution that investors over 50 can make to their IRA or 401(k) plans. Congressí motivation was in part to allow women who had taken time out of the workforce to "catch up" in accumulating retirement savings, but of course men can increase their contributions as well.

The maximum annual contribution to a traditional or Roth IRA used to be just $2000. Now investors can contribute $3000 a year, or $3500 if theyíre over 50. Investors participating in employer-sponsored retirement programs such as 401(k)s and 403(b)s can also contribute an extra $1000, raising the maximum contribution amount to $12,000.

If youíre over 50 check your plan and talk to your lawyer about increasing your contribution and coordinating the increased benefits with the rest of your estate plan.