chevron-down Created with Sketch Beta.

Probate & Property

May/Jun 2023

Death, Taxes, and Retirement Account Issues

Scott Engstrom


  • Estate planning and elder law attorneys must grapple not only with their own mortality, but also with that of their clients.
  • Some clients lean toward the “do nothing” option because they do not fully understand the vehicle in which their assets are maintained or are afraid of what happens if they do something.
  • There are also many layers of complexity that can be added to the base fact-pattern, such as rules related to inherited retirement accounts, frequent legislative and regulatory changes, and changing economic winds.
Death, Taxes, and Retirement Account Issues
Viktor_Gladkov via Getty Images

Jump to:

Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes.

So goes the famous quote attributed to Benjamin Franklin. This adage is not lost on estate planning and elder law attorneys, whose practices largely center around death and tax considerations.

Unless something fundamental changes with the human condition, mortality and death will remain topics of reflection that every person must grapple with. Estate planning and elder law attorneys must grapple not only with their own mortality, but also with that of their clients. For an elder law attorney, the goal is to ensure the clients’ medical and financial needs are accounted for until their deaths, including planning for retirement, long-term care, government benefits, and inter vivos gifts. Estate planning attorneys address death by working with their client to ensure their assets are appropriately disposed of after they pass away, consistent with the goals they expressed during their lifetime. Estate planning attorneys do this by carefully structuring trusts, wills, and other instruments that prepare assets for post-death disposition.

Although attorneys in this space take different approaches to these practice areas—some diving headlong into both, while others focus on one or the other—tax considerations are pervasive regardless of whether the attorney practices estate planning, elder law, or both. Tax issues come in many forms, including those related to gift taxes, estate taxes, treatment of trusts and LLCs, various exceptions and exclusions, and business succession planning, to name a few. No matter how simple or complex the client’s finances, there is no avoiding the necessity of a sound tax planning strategy for clients as they plan for their anticipated end-of-life care needs and any testamentary or other post-death bequests.

Given death’s inevitability and the existing regulatory environment for taxation, attorneys are frequently presented with the question of what to do with a retirement account when their clients transition from the labor force into retirement and beyond. This is a crucial stage for clients’ finances, and they should have plans in place for what life looks like in the event of a residential care need, and for what happens when they die. There are multiple options for this general fact-pattern, but the critical first step is establishing a client profile, including the client’s family and marital situation, health, existing financial resources, and underlying objectives.

It is difficult to illuminate the benefits of the various options that exist for retirement accounts at or after retirement without having specific client profiles. The remainder of this article, however, will focus on what each option entails and touch on certain categories of clients who might benefit from each option. Of course, this is provided as a high-level overview and not as a roadmap for planning that should be done in each type of case.

Do Nothing Option

For some clients, the best option for their retirement accounts when leaving the labor force permanently is to do nothing. For a client of this type, the decision is made not to liquidate, not to roll over, not to add additional funds, and not to begin taking distributions. Clients who fit into this category will generally be in at least fair health with few long-term medical concerns, will not have an immediate need for the funds in the retirement account, will not have any immediate planning needs requiring them to reduce their assets, and will not have any alternative investment opportunities that promise a higher return on investment.

This “do nothing” option is a bit of a misnomer in that doing nothing will still result in distributions. Specifically, once an individual reaches a certain age, he is required to take a set distribution referred to as a “required minimum distribution” or “RMD.” Per the IRS, RMD rules “apply to original account holders and their beneficiaries” for various types of retirement accounts, including traditional IRAs, SIMPLE IRAs, 401(k) plans, defined contribution plans, and others. Retirement Topics—Required Minimum Distributions (RMDs), (last updated Dec. 8, 2022), Notably, although Roth IRAs do not have an RMD requirement for the original account holder, beneficiaries of a Roth IRA are required to take RMDs.

When clients elect the “do nothing” option, it should still be an informed choice. Specifically, it should be a signal that, after careful consideration, they are comfortable where they are in terms of total assets, they have sufficient income from other sources, and they want to allow their retirement account more time to grow. Some clients lean toward the “do nothing” option because they do not fully understand the vehicle in which their assets are maintained or are afraid of what happens if they do something. It is the attorney’s role to make sure the decision to do nothing is carefully considered and appropriate for that specific client.

Continue to Fund

Another option that is not discussed frequently enough is the opportunity for the client to continue her retirement account contributions. Of course, there are specific rules attached to this strategy, though Roth IRAs provide some additional flexibility. One such rule limits contributions to a retirement account after retirement to those made from earned income as opposed to distributions from other retirement vehicles, annuities, and the like. Additionally, the client is still constrained by the applicable annual contribution limits. Retirement Topics—IRA Contribution Limits, (last updated Dec. 21, 2022), Specifically, the client’s earned income must be equal to or greater than the amount contributed in a given year. Contributions in excess of the earned income requirement are considered “excess” contributions and result both in a penalty and the inability to deduct the amount in excess of earned income. Publication 590-A (2021), Contributions to Individual Retirement Arrangements (IRAs), (last updated Feb. 22, 2022), (“Tax on Excess Contributions”).

Clients who elect to fund their retirement account even in retirement are often those who have a more comfortable income stream coming in each month and do not foresee a need to access the funds in the near future, opting instead to watch these additional funds grow. Because these clients are not looking for immediate access to the funds and they want time for their additional investments to mature, it is important that they think critically about the current status of their physical and mental well-being and how it projects into the future; good health is important when electing this option. One final, but crucial, element to this option is a source of earned income to contribute because, without it, continued contribution isn’t allowed.

Cash Out Option

For some clients, their financial needs are immediate, and they need access to their funds quickly. Typically, these clients are driven by factors not directly tied to the financial performance of their retirement account but rather external factors necessitating additional liquidity. Such external factors often relate to treatment for a serious or chronic medical condition or the care related thereto.

It is important for clients considering a cash out option to carefully deliberate before deciding to move forward because there are significant financial downsides to doing so. Specifically, if the client hasn’t reached the age of 59½, he will be forced to pay a penalty tax on the withdrawal in addition to paying any taxes on the distributed funds. This can have the effect of wiping out a large portion of the market gains earned on the retirement account contributions and should be done with extreme caution, particularly with retirement accounts containing significant dollar figures.

Because clients considering this option are often operating from an emotional place (a pressing need for money is emotionally taxing), it is crucial that the attorney clearly explain the financial risks associated with liquidation and explore any available alternatives. For example, if a client’s financial need is dire yet temporary, the client could consider borrowing from her retirement account and returning an amount equal to that withdrawn within 60 days in order to avoid penalties.

Rollover Option

One final option (for purposes of this article) is a rollover. But before discussing what a retirement account or retirement plan could be rolled into, it’s important to provide further detail on what a rollover entails. Specifically, it is important to understand how a rollover occurs.

Generally speaking, there are three ways that funds in an existing retirement account can be transferred to another account: (1) via direct rollover; (2) via 60-day rollover; and (3) via transfer. Rollovers of Retirement Plan and IRA Distributions, (last updated June 16, 2022), A direct rollover involves the transfer of a retirement plan directly from one financial institution (the one holding the original account with the funds) to another financial institution (the one holding the newly funded IRA). A 60-day rollover involves the funds from the original retirement account being distributed to the client, who is then charged with using the funds to fund the new retirement account within 60 days (as the naming convention would suggest). Similar to the direct rollover, a transfer involves the movement of funds directly between financial institutions. In the case of a transfer, this typically involves transferring the original retirement account to a new retirement account.

When choosing between a direct versus 60-day rollover, the attorney should consider the client’s level of financial sophistication and ability to facilitate somewhat complex financial transactions. If a client is unfamiliar or uncomfortable with moving significant amounts of money between accounts, a direct rollover or transfer, depending on the original plan type, will likely be most appropriate. A more sophisticated client, however, should be able to accomplish the rollover indirectly within the 60-day timeframe.

Before advising a client, even a sophisticated client, to jump headlong into a 60-day rollover, it is important that the client understand the legwork required. First, 60-day rollovers involve a significant amount of coordination among the original financial institution, the fund administrator, and the new financial institution. Second, “rollover distribution” rules add a layer of complexity to the transaction, not to mention of the tax implications that are outside the scope of this article. Third, clients must ensure that the funds distributed to them from the original account are reinvested in a timely manner—within 60 days—to avoid penalties. Fourth, only one rollover is allowed in any 12-month period.

But what’s the benefit of a rollover or transfer anyway? Put simply, control. When a client funds his retirement account through his employer, he is limited to the options available through that employer’s plan. After leaving the workforce, the client may wish to move his funds to another account administered differently. These differences in administration can include the availability of more diverse investment options, the ability to modify the portfolio’s makeup with increased specificity, and the ability to identify a retirement account with lower fees.

Additional Considerations

The options outlined in this article are not the only options available to estate planning and elder law attorneys and their clients. There are also many layers of complexity that can be added to the base fact-pattern, such as rules related to inherited retirement accounts, frequent legislative and regulatory changes, and changing economic winds.

The options outlined in this article do serve as a high-level primer on the topic of retirement accounts and issues related to the practice of elder law and estate planning. This information is not the end of the journey but the beginning. In this way (and only this way), this discussion is like Mr. Franklin’s soothsaying on the topic of our republic, with there being a “promise it will be durable” while leaving room for uncertainty. Well, except for death and taxes.