Grandparents Day, celebrated on September 13, is a chance to recognize the important role grandparents play in their families, from offering guidance and support to helping raise the next generation. For many retirees, that support extends beyond spending time with children and grandchildren. It can also include helping with college education costs and making thoughtful decisions about the assets and wealth they hope to pass down.
What Happens To Retirement Accounts When You Leave Them To Heirs?
As a grandparent, you may have decided to add a child or grandchild as a beneficiary on your taxable 401(k) or IRA or similar retirement account without understanding the additional tax implications that occurred due to the SECURE Act which became law in 2020.
The Setting Every Community Up for Retirement Enhancement (SECURE) Act eliminated the more favorable “stretch IRA” rules for most non-spouse beneficiaries. Under the new 10-year rule, inherited retirement accounts generally must be fully distributed by December 31 of the 10th year after the original owner’s death. (Certain eligible beneficiaries may be subject to different rules.)
Not only that, but depending on the circumstances, heirs may also be required to take annual distributions, called RMDs or required minimum distributions, during that 10-year period. For example:
- If the original account owner dies before age 73, or before they were required to start taking RMDs: The heir may have more flexibility about when to take distributions during the 10-year period.
- If the account owner dies after they were already required to take RMDs: The heir may have to take certain annual distributions during the 10-year period, in addition to ultimately emptying the account by the end of year 10.
RMDs and distributions from traditional IRAs and 401(k)s are generally taxed as ordinary income, which can increase an heir’s taxable income and tax bill, leaving them with less of their inheritance. (NOTE: Inherited Roth IRAs and Roth 401(k)s are also generally subject to the 10-year rule for many non-spouse beneficiaries, but qualified distributions are generally tax-free.)
For grandparents creating a financial legacy, understanding these rules can be an important part of deciding how different assets may support the next generation. Consider taking action now on your retirement accounts.
Does A Grandparent-Owned 529 Plan Affect FAFSA?
Many grandparents use 529 plans, state-sponsored accounts designed to save for education expenses, to help their grandchildren pay for college. Following the FAFSA Simplification Act, enacted in December 2023, grandparent-owned 529 plans are no longer reported as student assets or income on the Free Application for Federal Student Aid (FAFSA), so they generally won’t affect federal financial aid eligibility for most colleges.
529 plans also offer tax-free investment growth and tax-free withdrawals when the money is used for qualified education expenses. This allows grandparents to build a college fund for a grandchild while providing potential tax benefits along the way. However, if 529 funds are not used for qualified education expenses, taxes and penalties may apply. Beneficiaries can generally be changed only to related family members or yourself, so another investment option may offer greater flexibility.
How Can Grandparents Plan For Multiple Generations?
Grandparents often think about what they can leave behind for their children and grandchildren. But creating a meaningful legacy involves more than simply giving money away. A multigenerational financial and estate plan can help you leave more wealth by using strategies and establishing structures to help preserve assets, mitigate taxes, and provide greater control over how inherited wealth is used.
Your legacy can shape generations to come. Contact Chad Albano with Global View Capital Advisors today at (262) 230-1095 to explore strategies for managing, protecting, and transferring multigenerational wealth while carrying your values forward.
This content is for informational and educational purposes only and should not be construed as tax, legal, or individualized financial advice. Always consult with your tax advisor, attorney, and/or qualified financial professional regarding your specific situation before making any retirement plan or tax-related decisions.
Sources:
https://en.wikipedia.org/wiki/SECURE_Act
https://nationaltoday.com/grandparents-day/
https://www.hallmark.ca/en/get-inspired/history-of-grandparents-day/
https://www.savingforcollege.com/article/new-fafsa-removes-roadblocks-for-grandparent-529-plans
https://investormint.com/uncategorized/inherited-ira-rules-after-secure-act-2026-guide
https://www.irs.gov/publications/p590b
https://www.savingforcollege.com/article/who-maintains-control-529-plan
