When we think about our investments, we often tend to lump them all into one pile. While most investments do contribute to your liquid net worth, Individual Retirement Accounts (IRAs) are fundamentally different from other assets. They are far more complex and are governed by a unique set of rules that do not apply to traditional brokerage accounts, real estate, or other types of property.
To begin with, IRAs pass by contract, not by will. This means that beneficiary designations — not your estate documents — generally control who receives these assets. During your lifetime, IRAs are also subject to required minimum distributions (RMDs), and both lifetime and post-death distribution rules are highly complex. These rules have changed significantly in recent years due to the SECURE Act, SECURE 2.0 Act, and related IRS regulations.
Distributions from IRAs can trigger tax penalties if not handled properly, and the tax consequences can be substantial. IRA withdrawals and inherited IRAs are taxed as ordinary income rather than at more favorable capital gains rates. In addition, IRAs receive no step-up in basis at death, unlike many other assets. In some cases, IRAs can even be subject to double taxation at death — exposed to both estate tax and income tax, along with potential state taxes and IRS penalties.
Another important distinction is that IRAs cannot be freely transferred or gifted during your lifetime. There are only limited exceptions, such as qualified charitable distributions (QCDs) made directly to a charity or court-ordered transfers as part of a divorce settlement. IRAs also cannot be jointly owned, even in community property states, and ownership cannot be changed during life without triggering a full taxable distribution and ending the tax deferral.
Unlike home equity or other assets, IRA equity cannot be accessed or leveraged without causing taxes and possible penalties. IRAs also cannot be transferred to trusts during life, and naming a trust as a beneficiary requires very careful planning. Trusts must meet strict IRS requirements to qualify for favorable post-death distribution rules, and even properly drafted IRA trusts may no longer work as originally intended due to changes under the SECURE Act.
Beneficiary choices play a critical role in determining the ultimate value of an IRA to heirs. Some beneficiaries may qualify for special tax breaks that are often overlooked, while others may be forced into accelerated distribution schedules. Complicating matters further, IRAs do not follow traditional principal-and-income rules. In trust situations, this can result in the entire IRA being distributed to an income beneficiary, potentially leaving little or nothing for remainder beneficiaries.
Given all of these factors, IRAs require their own specialized estate planning strategies. Just as important, those strategies must be carefully integrated into your broader estate plan to ensure all assets work together efficiently. Treating an IRA the same way you treat other investments can lead to unintended tax consequences, missed opportunities, and planning mistakes that are difficult — or impossible — to fix later.
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Reich Asset Management, LLC is not affiliated with Kestra IS or Kestra AS. The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. To view form CRS visit https://bit.ly/KF-Disclosures.
Eric is President and founder of Reich Asset Management, LLC. He relies on his 25 years of experience to help clients have an enjoyable retirement. He is a Certified Financial Planner™ and Certified Investment Management AnalystSM (CIMA®) and has earned his Chartered Life Underwriter® (CLU®) and Chartered Financial Consultant® (ChFC®) designations.
