“How to leave grandkids your retirement savings:” could well be a million-dollar question for you! If you’re a retiree looking to be proactive on behalf of those you love, then you’re probably already thinking through how you can establish a lasting legacy for your grandchildren.
You’ve worked hard to make sure your family has the best start possible, and now you want to ensure that they are financially stable and are in the best position possible to achieve their goals in the years to come. One way to do this is by leaving them some or all of your retirement savings.
But what exactly is the best way to leave your retirement savings to your grandkids? Here are 6 options to consider…
Option 1: Designate them as Beneficiaries
One of the simplest ways to leave your retirement savings to your grandkids is by designating them as beneficiaries on your retirement accounts, such as a 401(k) or IRA. This way, they will receive the funds upon your passing without having to go through probate. As of 2024, individuals can contribute up to $7,000 per year into an IRA, so you could end up blessing your grandkids with a sizeable amount.
There are a couple of drawbacks to this option, however:
- Retirement accounts usually fall within your taxable estate, which means your grandchildren would first have to pay estate taxes before receiving the benefit of the account; and
- Funds from the IRA would also count towards their annual income, and therefore liable for income tax, too.
People used to be able to manage their income tax liability from inherited IRAs by spreading out distributions over their lifetimes, but now the requirement is for all funds in such accounts to be distributed within a 10-year period. In other words, navigating income tax liability from this kind of gift is now much harder.
One final practical note is that if you are married and you want to designate your grandchildren as beneficiaries on one of your retirement accounts, you will usually have to produce written consent from your spouse to enact this (depending on your account’s exact terms and conditions).
Option 2: Convert to a Roth IRA
Another option is to convert some or all of your traditional retirement accounts into a Roth IRA. As with traditional IRAs, you can contribute up to the annual limit of $7,000 per year (as of 2024). However, with Roth IRAs, your grandkids can inherit tax-free money in an investment account that will continue to grow over time. The reason for this is that you will need to pay the tax upfront (unlike a traditional IRA).
So, in contrast to other retirement accounts, Roth IRAs come with no estate or income tax implications for your beneficiaries. You might consider this option if your grandchildren are of working age — or close to it — as this will be one less thing for them to have to worry about: taxes are complicated enough already! You could be doing them a big favor by taking this option.
Remember, though, that you have to do this yourself: your grandkids cannot convert a traditional IRA into a Roth IRA after you pass away. You must make this change during your lifetime if you want them to benefit from it.
Option 3: Create a trust
If you want a greater degree of control over how your grandkids will receive and use the funds, you may consider creating a trust. This allows you to specify when and how the funds will be distributed, as well as any conditions or restrictions on their use. This option could be especially suitable if your grandchildren are minors and might struggle to make wise financial decisions on their own.
When you create a trust, you get to nominate a trustee (or trustees) who will manage how the funds are distributed, according to the terms of the trust, which might include provisions like:
- “The funds can only be used to fund their college education.”
- “The money must go towards the downpayment for a house.”
- “They may only access the amounts in the trust when they reach 30 years old.”
Essentially, you can include as much detail as you would like when setting up a trust, to ensure that your grandchildren use the gift in the way you desire.
Setting up a trust for your grandchildren could also help you to avoid Generation Skipping Transfer tax (GSTT). However, setting up a trust specifically to avoid GSTT liability will not be relevant for most people given that the tax only applies to gifts over $13.61 million per individual (as of 2024).
Trusts may also be quite expensive compared to other options on this list, given the need to hire an expert lawyer and any potential annual fees associated with maintaining the trust. This means that trusts may make more sense for ultra-high net worth individuals.
Option 4: Education gifts (529 plans)
If the final destination of gifts to your grandkids is your primary concern, there are other choices you can make… including 529 plans. Beneficiaries of 529 plans can make withdrawals towards tuition, school fees, accommodation, books and other education-related expenses, completely tax-free. Plus, as long as you are alive, you can manage the account yourself.
The exact rules vary from state to state, but Pennsylvania 529 plans enjoy the following enticing benefits:
- Earnings from the account are free from federal income tax;
- Earnings are also free from state income tax-free;
- Contributions to 529 plans come with a PA income tax deduction up to $18,000 per beneficiary per year, or $36,000 in total if you are married and filing jointly;
- Contributions to 529 plans are free from federal gift tax, up to $90,000 for a single gift, or $180,000 if you are married and filing jointly (this benefit is available where you choose to contribute 5 years up front); and
- 529 plans are also free from federal estate tax, for amounts up to and including your lifetime limit ($13.61 million in 2024).
When you consider that the average cost of a public, in-state college education was over $26,000 per year in 2023, or almost $56,000 per year for a private college education, this may be an especially meaningful way of helping your grandkids out and ensuring they have a bright future ahead of them.
As an added bonus, starting in 2024, your grandkids may even have the option to convert up to $35,000 from a 529 plan into a Roth IRA for their retirement (subject to certain conditions). In other words: yet another way to protect your grandkids’ future.
Option 5: Gift them cash during your lifetime
If you have a good relationship with your grandkids and want to see them enjoy the funds while you’re still alive, you can gift them money from your retirement savings during your lifetime. Everyone’s situation is unique, and it’s possible that you have very responsible grandkids!
Just be aware of any potential estate tax implications for large gifts: such gifts need to stay within your lifetime exemption of $13.61 million (as of 2024). You should know, however, that this limit, which is at an all-time high at present, is due to drop drastically starting in 2026 (unless Congress changes the law).
As a result, you would be wise to make any monetary gifts to your grandkids within the statutory limit sooner rather than later….
Option 6: Purchase life insurance
If you don’t currently have much in the way of retirement savings but still want to leave something for your grandkids, you may consider purchasing a life insurance policy and listing them as beneficiaries. This can provide them with a lump sum of money upon your passing.
Like some of the other options above, life insurance payouts are typically tax-free (i.e. they are not included as part of your taxable estate, or subject to other taxes).
Final Words
However you choose to leave your retirement savings to your grandkids, it’s important to consider the potential tax implications and seek advice from a financial advisor or estate planning attorney. With careful planning, you can ensure that your legacy lives on in the hands of those you love most.
So be sure to think through each of these options and work out which one is best for you and your family. Your grandkids will be grateful for the financial security and opportunities you have provided them with, even long after you’re gone. Trust us, they’ll thank you for it later!
And if you need any help getting started with the process of leaving your grandkids your retirement savings, why not reach out to one of Iron Point Financial’s Retirement Income Certified Professionals?
Disclosures:
Some IRA’s have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. Retirement Plans: Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty. Roth IRA: Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes. Annuities in an IRA: If you are purchasing an annuity to fund any tax-qualified retirement plan (IRA), you should be aware that ent vehicle and is not unique to an annuity. Carefully sider the features and benefits of the annuity before making the decision to purchase.
Before investing, the investor should consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. The use of trusts involves a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing such strategies. The opinions are those of the writer, and not the recommendations or responsibility of Cetera Advisor Networks LLC or its representatives. For a comprehensive review of your personal situation, always consult your legal advisor. Neither Cetera Advisor Networks LLC, nor any of its representatives may give legal advice.
