What happens to your retirement accounts after you die depends largely on your personal situation and legacy planning goals. Are you single or married? Do you have children? Do you want to leave money to charity? All these factors influence how your accounts are handled after you’re gone.

In this week’s Money Wisdom Question Series, Nicholas J. Colantuono, CFP® unpacks the impact of different beneficiary designations on your retirement accounts.

Tax Implications: Individuals vs. Charities

If you leave your retirement accounts to an individual, they’ll likely owe taxes on the withdrawals. But if you name a charitable organization as your beneficiary, there are ways for your gift to be passed on tax-free. This can be a smart tax strategy if you’re charitably inclined, as it maximizes the impact of your donation and avoids burdening your loved ones.

Leaving Money to a Spouse

When you name your spouse as a beneficiary, there are some additional factors to consider. Under the SECURE Act 2.0, a surviving spouse can roll inherited retirement assets into their own IRA. Once that happens, they must take required minimum distributions (RMDs) based on their own age and life expectancy.

But this move can trigger a tax ripple effect. If the surviving spouse is already at RMD age, the inherited assets can increase the size of their distributions. This can potentially push their taxable income into a higher tax bracket.

How Inheritance Rules Affect Heirs

For beneficiaries other than your surviving spouse, such as children or grandchildren, different rules apply under the SECURE Act 2.0. Most non-spouse beneficiaries must fully withdraw and pay taxes on the entire inherited account within 10 years of your death, as long as they’re more than 10 years younger than you. This can create a significant and sometimes unexpected tax burden, especially if the beneficiary is in their peak earning years.

Why Tax Planning Matters

These rules create an important tax planning opportunity, particularly when it comes to Roth conversions. In many cases, traditional IRAs and 401(k)s are among the least tax-efficient assets to leave to loved ones. On the other hand, inherited Roth accounts can typically be passed down to heirs tax-free.

With thoughtful planning, you can significantly improve the way your legacy is received. If this is important to you, consider speaking with a financial advisor about implementing tax-smart strategies into your plan.