What to Consider if Your Inheritance Includes a Retirement Account

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Did you recently receive an inheritance that included a retirement account, such as a 401(k) or IRA? You may wonder when you should and are required to take distributions and what investment strategy will be most effective for your financial situation.

The main characteristic of a retirement program inheritance is that most beneficiaries must deplete the account’s funds within 10 years of the original account holder’s passing. The 10-year rule, passed within the SECURE Act in December 2019, does not specify an amount you must distribute, just that you must withdraw all the funds within 10 years. There are a few exceptions to the 10-year timeframe you may qualify for if you’re the legal spouse not more than 10 years younger than the decedent, chronically ill, or disabled. Different rules apply to minor beneficiaries.

For the sake of this blog, we will focus on non-spouse recipients who do not meet any exceptions. When you decide to take your distributions will determine the type of investment strategy that will best fit your financial needs. Let’s discuss what you should consider when selecting your withdrawal strategy.

Choosing a Withdrawal Strategy

When you decide to start taking distributions may be different from someone else’s approach for several reasons. Below, we’ll outline what may help you determine your withdrawal schedule and how it will affect your investment strategy and planning.

  • Your current financial situation. If you need the additional cash flow now, taking a lump sum may be an effective path to explore with your inheritance. You should, however, consider how a lump sum will affect your taxes if the account is considerable. Immediate withdrawals could also affect your investment risk tolerance if you plan to rely on the distributions as an extra income stream. However, if you do not need additional income, you may consider how the funds can grow tax-free for a few years or the entire 10 years to take advantage of market fluctuations.

  • Your next life stage. Are you retiring soon? If you’re planning to retire within five years, your inheritance can be another form of retirement income. In this case, you’ll want to discuss with your financial advisor your options and how a little more risk could benefit your long-term savings. However, let’s say you have seven to 10 years or longer until your retirement. Then, you may benefit from a more aggressive investment strategy and possibly two market cycles to potentially add more value.

  • Your tax impact. Whenever you decide to start taking your distributions, you should consult with a tax professional about possible tax implications. Every type of retirement account has different taxation on distributions, so it’s helpful to evaluate how your taxes could be affected. If the account is significant, a lump sum may push you into a high tax bracket, and you may determine withdrawing a monthly amount may mitigate a higher tax burden. If the amount is smaller, perhaps a longer-term approach will produce higher, tax-free returns within the required timeframe.

While the 10-year rule may limit when and how to use or invest your money, you have several investment and planning options based on the type of retirement program you inherited, your current financial situation, and your future goals. Once you decide on your withdrawal strategy, it will better inform how to invest your funds to meet your needs. We can help you navigate the different scenarios to understand the short- and long-term financial implications of your withdrawal and investment approach. Contact our team to learn how we can guide you through the complex rules associated with your retirement program inheritance so you can plan for today and prepare for the future.

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.

Brahm Named to LPL’s Executive Chairman’s Club

We are excited to announce that Brahm Rossiter was recently named to LPL Financial Holdings’s Executive Chairman’s Club. This honor speaks to Brahm’s commitment to our clients and their unique financial needs. It is also a reflection of our clients’ loyalty in their relationship with us as a firm and their willingness to share their experience with others. They allow Brahm, and us, to continue to grow.

This award is given to the top 5% of LPL’s more than 17,000 financial advisors across the nation and is based on the annual production among them.

Rossiter Wealth Management is an affiliate of LPL Financial, one of the nation’s largest independent broker-dealers based on total revenues, according to Financial Planning magazine June 1996 – 2020. LPL equips its advisors with various tools and technologies that we use to better serve our clients and their financial needs.

Congratulations to Brahm on this recognition!

How to Design a Retirement Program for Your Large or Small Business

Implementing a retirement program for your company is a significant step in attracting and retaining top talent, affording your employees long-term financial benefits, and scaling your business overall. Still, the features and benefits of retirement plans vary by business based on several factors. Which ones should your company consider? We’ll explain what small and large businesses should think about when designing a successful program.

Employee and Company Goals

Your goals are the foundation for designing a retirement program that specifically meets your business’s and employees’ needs. Begin by outlining your goals—what you want for your company and what you want for your employees.

In addition to providing for your employees, you might consider the current stage of your business cycle. For example:

  • A smaller, family-owned business thinking about changing leadership may be concerned with how the retirement program will affect their tax and succession planning.

  • A startup enterprise may want to design a 401(k) plan for attracting and retaining experienced talent.

  • An established company may focus on updating its current plan to meet new compliance standards.

Your employees may want or need:

  • The empowerment to retire when they choose

  • Retirement education and personal financial coaching

  • Profit-sharing options

Plan Contribution Requirements

There are a wide array of retirement programs available to serve your employees well. The plan or plans you select will be based on your goals and operational costs versus the required contributions to maintain compliance. Whether you’re the owner of a large or small business, there may be a significant range in salaries among your employees, which will determine plan participation and if you’ll meet a plan’s contribution requirements. Here’s what you should consider:

  • Identify employees or divisions of employees that won’t participate in the primary retirement program. Excluding part-time employees or C-Suite executives, for example, may reduce your overall plan costs or change your contribution requirements.

  • There are specific IRS requirements that ensure retirement plans are balanced and mutually benefit all employees. For example, in a small business with few employees, if upper management maxes out their contributions while hourly employees contribute at a lower amount, it might disproportionately allocate plan funds to higher-paid employees, and corrections would be required to balance the plan. Review plan options to ensure you meet contribution requirements to uphold compliance standards.

Technology and Logistics

Logistics and technology are other factors that will determine the success of your retirement program. For example, how will you deliver plan disclosures and employee education?

  • Large companies: you might be able to rely on resources such as email or a benefits website to sufficiently deploy annual disclosures and employee education. You may require additional planning for an in-person group training, while one-on-one employee meetings may not be plausible at all.

  • Small and family-owned companies: you may be able to distribute required documents and provide group and individual employee education via individual and/or in-person communications that require fewer logistics. Just be sure to keep a record of communications.

From your business size to what technology you use, it’s no wonder that retirement plans are highly customized to the individual company. At RWM, we call it a job well done when both employers and employees win. If you’re ready to implement a retirement program that creates value for your employees while also meeting your needs as the owner, we can help. Contact us if you have questions about designing or updating your retirement program.