This article is intended to give you a summary of retirement planning, the most common retirement accounts, and the estate planning implications of a retirement account. You should always consult with a financial advisor and/or accountant when establishing, changing, or converting any retirement accounts.
When it comes to retirement planning, it’s not just about saving — it’s about preserving and passing on what you’ve built in the most tax-efficient way possible. For estate and tax planning in Arkansas, here are some key takeaways you need to know:
1. Understand the Type of Retirement Account You Own:
Not all retirement accounts are treated equally for tax purposes. The two most common retirement accounts are the Individual Retirement Account (IRA) and the 401(k). An IRA and a 401(k) can either be taxed as “traditional” or “roth.” It is important to note that an IRA and can be either individually owned or employer sponsored. However, a 401(k) is an employer sponsored retirement account.
- Traditional IRA/401(k): Contributions to a “Traditional” IRA or a “Traditional” 401(k) are often tax-deductible in the year that you make the contribution and are considered “pre-tax.” However, withdrawals made during retirement are fully taxable at the individual tax rate in the year of the withdrawal. The gains achieved during working years are tax-deferred and you pay no capital gains taxes while the money is kept in the account.
- Roth IRA/401(k): Contributions to a “Roth” IRA or “Roth” 401(k) are not tax deductible in the year that you make the contribution, and they are made with after-tax dollars. Meaning, the money used for Roth contributions has already been taxed, but the benefit is that qualified withdrawals during retirement are tax-free. This means that the growth of your account is tax free and the allowable withdrawals upon retirement are tax free.
Whether a traditional or Roth account produces more long-term wealth depends on whether you expect your future tax rate to be higher or lower than your current rate. If you expect your tax rate during your working years to be higher than your tax rate in your retirement years, then electing a “Traditional” account may provide a tax benefit. However, if you expect your tax rate in your working years to be less than your tax rate in retirement years, then electing a “Roth” account may provide a tax benefit.
2. Age of Withdrawals:
For a Roth IRA, withdrawals of earnings are tax-free if you are 59½ or older AND it has been 5+ years since your first contribution. For a Roth 401(k), withdrawals of earnings are tax-free if you are 59½ or older. However, if you take out earnings before 59½, you may owe income tax plus a 10% penalty on the earnings portion. Exceptions exist for first-time homebuyers ($10,000 limit), qualified education expenses, and other specific situations.
For a Traditional IRA or Traditional 401(k), you are eligible to start withdrawing at the age of 59½.
Early withdrawals from a Roth account or a Traditional account may result in a federal penalty tax of 10% as well as other taxes or penalties. There are several exceptions for withdrawals and early withdrawals.
3. Contribution Limits and Eligibility of Traditional IRA, Roth IRA, Traditional 401(k), and Roth 401(k):
For a Roth IRA, there are contribution limits and eligibility limits to contribute to a Roth account is based upon income and may be phased out completely for higher earners.
Eligibility of a Roth IRA: For a Roth account, in 2026 single filers must make less than $153,000 to contribute to a Roth IRA and married couples filing jointly must make less than $242,000.
Eligibility of a Traditional IRA: Generally, anyone with earned income can contribute to a Traditional IRA or a Traditional 401(k), however, there are income limits as to the deductibility from taxes.
Eligibility of a Roth 401(k) or a Traditional 401(k): Anyone with earned income whose employer offers a Roth 401(k) or a Traditional 401(k) is eligible to contribute.
Contribution Limits of an IRA: For tax year 2026, if you are under 50 years of age, you can contribute up to $7,500 per year to either a Roth IRA or a Traditional IRA. If you are over 50, you can contribute up to $8,600 per year.
Contribution Limits of a 401(k): For tax year 2026, if you are under 50 years of age, you can contribute up to $24,500 per year to either a Roth 401(k) or a Traditional 401(k). If you are over 50, you can contribute up to $32,500 per year.
As you can see, the contribution limits are much higher for a 401(k) than an IRA.
4. What Are Required Minimum Distributions (RMDs):
Required minimum distributions (RMDs) are the minimum distributions that a person must start receiving upon reaching approximately 73 years old. The reason for this is that the IRS does not want people to be able to defer taxes on their retirement account earnings indefinitely.
Roth IRA and Roth 401(k): There are no requirement minimum distributions (RMDs) for Roth IRAs. However, it is important to note that a Roth IRA inherited from another person (except a spouse) is subject to RMDs and must generally be distributed out in full within 10 years after that person’s passing. We discuss this concept more below.
Traditional IRA and Traditional 401(k): Starting in 2023, the age at which you must begin taking RMDs from traditional retirement accounts increased to 73 (rising to 75 in 2033). The RMD amount that you may be required to take is calculated based upon your age, life expectancy, and other factors. The failure to take RMDs can trigger a 25% penalty- reduced from the prior 50% under the SECURE 2.0 Act.
5. Inherited IRAs and the 10-Year Rule
For IRAs and 401(k)s inherited from another person, most non-spouse beneficiaries must liquidate the account within 10 years of the original owner's death by taking monthly, quarterly, or annual distributions. Also, if the decedent was 73 years of age or older at the time of passing and was required to take RMDs, then the beneficiary may also be required to take the RMDs as well as liquidating the account within 10 years.
If the beneficiary is a spouse, then the spouse can either treat that account as their own, roll that IRA or 401(k) over into their own plan, or take the “spousal election” and delay the RMDs until the decedent would have reached 73 years of age.
Exceptions: Certain “Eligible Designated Beneficiaries” (EDBs) can stretch distributions over their own life expectancy and avoid the 10 year distribution rule and possibly the RMD rules including:
- Surviving spouse
- Minor children (until majority)
- Disabled or chronically ill beneficiaries
- Beneficiaries less than 10 years younger than the decedent
6. When a Trust Is the Beneficiary:
Setting up a retirement trust can be an extremely useful estate planning tool if you are concerned with your children or beneficiaries receiving a large sum of money from your retirement account, your children going through a divorce, a lawsuit involving your children, or creditors of your children.
We discuss the details of retirement trusts in our article titled “Retirement Trusts.”
7. Second Marriages Raise Special Planning Concerns
Planning for blended families is one of the trickiest areas in estate and retirement planning. Here’s why:
- 401(k) Accounts: Federal law (ERISA) automatically gives a surviving spouse rights to 100% of the account regardless of the beneficiary designation unless that spouse signed a waiver.
- IRAs: Governed mostly by Arkansas law, these may allow for more flexibility in beneficiary designations.
If you fail to update your beneficiary designation after divorce, your ex-spouse may still inherit your 401(k) even if your Will says otherwise. This happened in Egelhoff v. Egelhoff, where the U.S. Supreme Court ruled that ERISA preempted state law.
8. Tax-Smart Charitable Giving
Once you reach age 70½, you can make Qualified Charitable Distributions (QCDs) directly from your IRA to a qualified charity. This can satisfy your RMD and reduce your taxable income.
9. Beneficiary Designations
You should always have proper beneficiary designations on your retirement account. Not having a beneficiary designation can subject your retirement account to Arkansas probate and estate law.
10. Plan Early, Review Often
Retirement assets are often a family’s largest investment, and they come with their own set of rules that can trip up even careful estate plans. With frequent changes in tax law and increasing complexity in family dynamics, proper planning is essential.
Located in Batesville, Melbourne, Heber Springs, and Mountain View, Arkansas, and serving all of Arkansas, Reeves Law Firm stands ready to handle any civil, estate, estate planning, guardianship, personal injury, probate, or any other litigation matters that may arise.
Reeves Law Firm primarily serves Independence County (Batesville), Jackson County (Newport), Sharp County (Ash Flat, Highland, Cherokee Village), Lawrence County (Walnut Ridge), Cleburne County (Heber Springs, Greers Ferry, Fairfield Bay), Izard County (Melbourne), Stone County (Mountain View), White County (Searcy), and Baxter County (Mountain Home).
Give us a call in Batesville, Arkansas, at (870) 793-0021
Give us a call in Heber Springs, Arkansas, at (501) 302-8383
Give us a call in Melbourne, Arkansas, at (870) 291-9374
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