Managing Retirement Accounts When a Beneficiary Has Special Needs

Planning for retirement is complex on its own. When a beneficiary has special needs, that complexity increases, and so do the stakes. Without the right strategy, well-intentioned decisions can unintentionally jeopardize critical benefits or create unnecessary tax burdens.

At Sequoia Financial Group, our Special Needs Financial Planning approach is BUILT FOR YOU, designed to coordinate every moving piece so your plan supports, not disrupts, your loved one’s future.

Why Beneficiary Designations Matter More Than You Think

Retirement accounts like IRAs and 401(k)s often pass directly to named beneficiaries, bypassing your will. That makes beneficiary designations one of the most important, and frequently overlooked, elements of a special needs plan.

If a retirement account is left outright to an individual with disabilities, it could:

• Disqualify them from means-tested benefits like Supplemental Security Income (SSI), Medicaid and Housing Vouchers
• Potential Medicaid Payback
• Accelerate required withdrawals, increasing taxable income
• Limit long-term control over how assets are used

According to the Social Security Administration, SSI eligibility is tied to strict asset limits, generally $2,000 for an individual.¹ A direct inheritance can quickly exceed that threshold. The asset and required distributions from the IRA could also disqualify from Medicaid

The Role of a Special Needs Trust (SNT)

One of the most effective strategies is naming a properly structured Special Needs Trust (SNT) as the beneficiary of retirement accounts.

An SNT allows assets to be used for the benefit of the individual without disqualifying them from public benefits, provided distributions are handled correctly. When paired with retirement accounts, the trust must also be carefully drafted to qualify as a “see-through” trust under IRS rules to preserve favorable distribution treatment.²

This is where coordination is critical. The trust, beneficiary designation, and tax strategy must all align.

Understanding the SECURE Act Impact

Most non-spouse beneficiaries must withdraw the full account within 10 years. However, certain beneficiaries, including individuals with disabilities, may qualify as “Eligible Designated Beneficiaries,” allowing for life expectancy-based distributions instead.³

This distinction is essential. Structuring the plan incorrectly could trigger faster withdrawals, higher taxes, and reduced long-term support.

If your estate plan includes multiple beneficiaries, coordination between retirement accounts and a Special Needs Trust becomes even more important. When structured properly, it can create additional tax planning opportunities under the SECURE Act. When not carefully aligned, it may lead to accelerated distributions, higher overall tax exposure, and reduced flexibility—particularly when more than one beneficiary is involved.

ABLE Accounts as a Complementary Tool

In some cases, distributions from retirement accounts (via a trust) can be coordinated with an ABLE account. These accounts allow individuals with disabilities to save and spend funds without affecting Medicaid and SSI eligibility, within certain limits.

The Internal Revenue Service notes that ABLE accounts can grow tax-deferred and be used for qualified disability expenses.⁴ When integrated properly, they can provide flexibility alongside a trust-based strategy.

The Cost of Getting It Wrong

Avoidable mistakes include:

• Naming the individual directly instead of a trust
• Failing to update beneficiary designations after establishing an SNT
• Overlooking the tax implications of required distributions
• Not coordinating advisors across legal, tax, and investment disciplines

These gaps can lead to lost benefits, accelerated taxes, and reduced quality of life.

A BUILT FOR YOU Approach

At Sequoia Financial Group, we take ownership of this complexity. Our team works collaboratively across disciplines, advisors, attorneys, and tax professionals, to see that your retirement assets are aligned with your broader plan.

Because when it comes to supporting a loved one with special needs, it’s not just about what you leave behind. It’s about how thoughtfully, and strategically, you do it.