What’s in the article:
This article explains how retirement accounts like IRAs and 401(k)s are handled after death, how current tax laws impact beneficiaries, and how Wisconsin families can plan to reduce taxes while protecting the people they love.
For many Wisconsin families, retirement accounts are not just part of their wealth—they are one of the largest assets they own.
Recent data shows that approximately 72.9% of Wisconsin households have some form of retirement account, with average savings around $137,000. In addition, the Wisconsin Retirement System (WRS) alone holds roughly $155 billion in assets, reflecting how central retirement planning is across the state.
For many households, retirement accounts and home equity together make up nearly 80% of total net worth.
Because of this, understanding what happens to these accounts after death is essential.
Unlike other assets, retirement accounts are governed by a complex mix of federal tax law, beneficiary designations, and estate planning strategies. These rules can significantly impact how much your loved ones ultimately receive.
How Retirement Accounts Are Handled After Death in Wisconsin
In Wisconsin, retirement accounts such as IRAs and 401(k)s typically pass directly to named beneficiaries. This means they usually do not go through probate, unlike assets controlled by a will. However, avoiding probate does not mean avoiding complexity.
Retirement accounts are subject to federal income tax rules, and how those rules apply depends on who inherits the account and how distributions are taken. This is where many families are caught off guard.
How Tax Laws Affect Inherited Retirement Accounts
Most assets pass to beneficiaries without income tax consequences. Retirement accounts are different.
When a beneficiary inherits a traditional IRA or 401(k), withdrawals are generally taxed as ordinary income. Before 2020, many beneficiaries could “stretch” distributions over their lifetime. This allowed smaller withdrawals and extended tax-deferred growth.That changed with the SECURE Act of 2019.
Under current law, most beneficiaries must withdraw the full account within 10 years of the original owner’s death. This significantly accelerates taxation.
For Wisconsin families, this often means that inherited retirement income is added on top of existing earnings. For example, an adult child in their peak earning years may be pushed into a higher federal tax bracket, reducing the overall value of the inheritance.
Which Beneficiaries Receive More Favorable Treatment?
Not all beneficiaries are treated the same under current law. Certain individuals qualify as eligible designated beneficiaries, which allows more flexible distribution options. These include:
- Surviving spouses
- Minor children of the account owner
- Disabled or chronically ill individuals
- Beneficiaries close in age to the account owner
Surviving spouses have the most flexibility. They can roll the inherited account into their own IRA and delay required distributions. Minor children can take distributions based on life expectancy until age 21, after which the 10-year rule applies.
These distinctions make it critical for Wisconsin families to coordinate beneficiary designations with their overall estate plan.
How Trust Planning Can Help Protect Retirement Accounts
Retirement accounts often present a challenge: how to balance tax efficiency with protection.
Naming a beneficiary directly may seem simple, but it provides no safeguards if that beneficiary faces divorce, creditor issues, or poor financial decision-making. A properly designed trust can help address these concerns.
For example, some trusts are structured to pass required distributions directly to beneficiaries, keeping taxes at the beneficiary’s personal rate. Others retain funds within the trust to provide long-term protection, even though that may result in higher tax rates.
The key is proper design.
A trust that is not specifically structured for retirement accounts can create unintended tax consequences, including forcing faster withdrawals or losing favorable treatment.
Why Retirement Account Planning Is Especially Important in Wisconsin
Wisconsin families often have a unique mix of retirement assets, including private retirement accounts and, for many public employees, benefits from the Wisconsin Retirement System (WRS).
With over 704,000 participants, WRS is one of the largest and best-funded pension systems in the country. For those who rely on it, it provides a stable income stream that complements other retirement savings.
However, for many households, IRAs and 401(k)s still represent a significant portion of transferable wealth.
Because these accounts are both valuable and highly regulated, coordinating them properly within an estate plan is essential.
Without coordination, families may face:
- Higher taxes
- Loss of control over distributions
- Lack of protection for beneficiaries
- Missed planning opportunities
Why the Right Guidance Matters
Planning for retirement accounts requires more than simply naming a beneficiary.
It involves understanding how federal tax law interacts with your broader estate plan and your family’s specific needs.
An experienced advisor will consider questions such as:
- Whether a spouse needs long-term access to funds
- Whether children need protection from creditors or poor decisions
- Whether any beneficiaries have special needs
- How age differences impact tax strategies
This level of planning ensures that retirement accounts are not treated in isolation, but as part of a comprehensive strategy.
How Wisconsin Families Can Create a Plan That Works
Retirement accounts are too significant to leave to chance.For many Wisconsin families, they represent decades of work and a substantial portion of total wealth. Without proper planning, a large percentage of those assets can be lost to unnecessary taxes or mismanagement.
With thoughtful planning, however, it is possible to:
- Minimize tax impact
- Protect beneficiaries
- Maintain control over distributions
- Ensure assets are used as intended
At Anchor Law, the focus is on helping families create a Life & Legacy Plan that coordinates retirement accounts with the rest of their estate plan, so nothing is left to guesswork.
Want to better understand how to protect your family and your legacy? Register for one of our upcoming workshops to learn more.
https://myanchorlaw.submitrequests.com/workshop-a
FAQ: Retirement Accounts in Wisconsin
Do retirement accounts go through probate in Wisconsin?
No. Retirement accounts typically pass directly to named beneficiaries and do not go through probate, unless no beneficiary is designated.
Do beneficiaries pay taxes on inherited IRAs?
Yes. Most inherited retirement accounts are subject to income tax when withdrawn. The timing of withdrawals affects how much tax is paid.
What is the 10-year rule for inherited retirement accounts?
Most non-spouse beneficiaries must withdraw the full balance of an inherited retirement account within 10 years under current federal law.
Can a trust be named as a beneficiary of a retirement account?
Yes, but it must be properly designed. A poorly structured trust can create tax issues, while a properly designed trust can provide protection and control.
How do retirement accounts fit into an estate plan in Wisconsin?
Retirement accounts are a major part of wealth for many Wisconsin families. Coordinating beneficiary designations, tax planning, and trust structures is essential to ensure assets are transferred efficiently and protected.
This article is a service of Attorney John F. Koenig, Anchor Law, Life and Legacy Planning, LLC, a Personal Family Lawyer® Firm. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a comprehensive Life & Legacy Planning Session™, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Life & Legacy Planning Session™.
The content is sourced from Personal Family Lawyer® for use by Personal Family Lawyer® Firms, a source believed to provide accurate information. This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal, or investment advice. If you are seeking legal advice specific to your needs, such advice services must be obtained on your own separate from this educational material.