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BancorpSouth Review: Checking, Savings, CD, Money Market and IRA Accounts

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

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BancorpSouth’s checking account options

BancorpSouth My Way Checking

This entry-level checking account does not earn interest.
  • Minimum opening deposit: $50
  • Monthly account maintenance fee: $5 (waived if you meet specific requirements, detailed below)
  • ATM fee: No fee for using BancorpSouth ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call the bank to ask about current costs associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross border fee.
  • ATM fee refund: None
  • Overdraft fee: $36 per item

This checking doesn’t earn interest, but it’s relatively easy to avoid monthly fees. You can avoid the above-referenced service charge by meeting one these requirements during the statement cycle:

  • $100 minimum daily balance, or
  • Five debit card purchase transactions, or
  • At least one direct deposit of $100 or more

The My Way Checking account also comes with access to BudgetWi$e, the bank’s free online budgeting tool.

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BancorpSouth Performance Checking

This account lets you earn higher interest rates if you have a relationship with the bank.
APYMinimum Balance to Earn APY
0.10%$30,000+
1.51%$0.01 - $30,000
  • Minimum opening deposit: $50
  • Monthly account maintenance fee: $10 (waived if you meet certain requirements, detailed below)
  • ATM fee: No fee for using BancorpSouth ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call the bank to ask about current fees associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross-border fee.
  • ATM fee refund: The bank will refund their $2 ATM fee plus up to $2 in fees paid by the ATM owner for the first five non-BancorpSouth transactions if the account holder meets all three of the higher rate requirements listed below.
  • Overdraft fee: $36 per item

The standard interest rate for this checking account is pretty meager, but it may be easy for you to earn the bonus rate. The Bonus APY of 1.51% applies on balances of $30,000 or less if you meet these three requirements each statement period:

  • Must have at least one direct credit or debit, such as direct deposit or automatic bill payment
  • Must make at least 12 debit card purchase transactions
  • Must be enrolled to receive online statements

You’ll definitely want to make sure you meet the requirements to receive the bonus rate every month. Doing so will not only get you a higher APY, but you’ll also be able to avoid the $10 monthly service charge and get up to $10 in ATM fees refunded each month. You can also avoid the monthly service charge by maintaining a $1,000 minimum daily balance in your account.

The Performance Checking account also comes with access to BudgetWi$e, BancorpSouth’s free online budgeting tool.

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BancorpSouth Interest Plus Checking

This account lets you earn higher interest rates as you deposit more money in your account.
APY
Minimum Balance to Earn APY
0.03%$0.01 - $4,999.99
0.03%$5,000 - $9,999.99
0.03%$10,000 - $24,999.99
0.03%$25,000 - $49,999.99
0.05%$50,000 - $99,999.99
0.10%$100,000+
  • Minimum opening deposit: $1,000
  • Monthly account maintenance fee: $10 (waived if you maintain a $1,000 minimum daily balance)
  • ATM fee: No fee for using BancorpSouth ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call BancorpSouth to ask about current fees associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross-border fee.
  • ATM fee refund: None
  • Overdraft fee: $36 per item

The interest rates available for this checking account aren’t exactly generous. The highest rates available on this account are quite a bit lower than the bonus rate available through the Performing Checking account. However, since the bonus rate is available only on balances up to $30,000, this account might be a better option if you maintain a higher balance in your checking account.

And there’s one more benefit that might be appealing to people who prefer paper statements with imaged checks. This service is free for Interest Plus Checking account holders, whereas some of BancorpSouth’s other checking account options charge a fee.

The Interest Plus Checking account also comes with access to BudgetWi$e, BancorpSouth’s free online budgeting tool.

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BancorpSouth Heritage Checking

This account gives seniors age 62 and older the ability to earn travel and bonus rewards.
APYMinimum Balance to Earn APY
0.05%$0.01
  • Minimum opening deposit: $50
  • Monthly account maintenance fee: $8 (waived if you maintain a $500 minimum daily balance)
  • ATM fee: No fee for using BancorpSouth ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call BancorpSouth to ask about current fees associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross-border fee.
  • ATM fee refund: None
  • Overdraft fee: $36 per item

The interest rates available for this checking account are modest, but it offers some unique perks. Account holders receive:

  • One free box of checks per year
  • $100,000 common carrier Accidental Death and Dismemberment Insurance
  • A free Savers Club Book with discount offers at over 3,000 participating lodging properties, theme parks and car rental companies
  • The ability to receive discounts and earn cash rewards when they arrange travel through a third-party partner
  • Free copies of Sojourns magazine

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BancorpSouth Student Checking

This account doesn’t earn interest, but it makes free checking available to students age 24 and under with no minimum balance requirements.
  • Minimum opening deposit: $50
  • Monthly account maintenance fee: $0
  • ATM fee: No fee for using BancorpSouth ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call BancorpSouth to ask about current fees associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross-border fee.
  • ATM fee refund: None
  • Overdraft fee: $36 per item

This checking account doesn’t earn interest, but with no minimum monthly balance requirements and no monthly maintenance fee, it’s an affordable option for college students. Plus, it comes with a few nice features. Account holders receive their first box of 25 checks printed at no charge and have the option to upgrade to checks with their college’s logo.

The Student Checking account is available for students through the age of 24. After age 24, the account will automatically be converted to another standard checking account.

The Student Checking account also comes with access to BudgetWi$e, BancorpSouth’s free online budgeting tool.

How to get BancorpSouth’s checking accounts

You’ll need to provide some basic personal information, such as your name, Social Security number, date of birth, address and driver’s license number. You’ll also need details for your current U.S. checking or savings account to fund your new account. If you don’t already have a U.S. checking or savings account, you’ll have to apply in person at a BancorpSouth location.

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How BancorpSouth’s checking accounts compare

This bank’s checking accounts offer modest interest rates compared with the best online checking accounts out there. Truly fee-free checking is only available to students, although it’s possible to avoid monthly service fees rather easily.

If you’re between the ages of 24 and 62 and don’t mind jumping through a few hoops to meet the requirements each month, you’ll earn a better rate with BancorpSouth’s Performance Checking than you will with their other accounts. However, you might be able to earn more by keeping less money in your checking and more in another interest-bearing account.

BancorpSouth’s savings account options

BancorpSouth My Goal Savings

A good beginner account focused on saving toward a goal.
APYMinimum Balance to Earn APY
0.05%$0.01
  • Minimum opening deposit: $100
  • Minimum balance to earn APY: $0.01
  • Monthly account maintenance fee: $5 (waived if you maintain a minimum balance of $100)
  • ATM fee: No fee for using BancorpSouth ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call BancorpSouth to ask about current fees associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross-border fee.
  • ATM fee refund: None
  • Overdraft fee: $36 per item

This is BancorpSouth’s basic savings account, and an option if you’re looking for a simple, no-frills place to store your cash. This account does have a monthly fee, but you can easily avoid it by keeping a minimum of $100 in your account.

Per Regulation D, you’re allowed up to six certain withdrawals or transfers per month. After that, there’s a $5 fee for each transaction from the bank.

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BancorpSouth Performance Savings

Earn a higher rate of interest by making a minimum monthly deposit.

Account holders can earn a higher interest rate on balances of $100,000 or less by making a minimum of $50 in total deposits into the account through either online banking transfer or ACH deposit. If you don’t make the minimum deposit, your account will earn the standard rate of interest. Call BancorpSouth to learn about the current rates.

  • Minimum opening deposit: $50
  • Minimum balance to earn APY: $0.01
  • Monthly account maintenance fee: $2.50 (waived if you maintain a minimum balance of $50)
  • ATM fee: No fee for using BancorpSouth ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call BancorpSouth to ask about current fees associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross-border fee.
  • ATM fee refund: None
  • Overdraft fee: $36 per item

This savings account is an option if you plan to save at least $50 per month and can take advantage of the bonus interest rate. Even if you skip a month, the service fee is half that of the My Goal Savings account.

Again, watch out if you plan to make a lot of withdrawals each month. You’re allowed up to six certain withdrawals or transfers each month, per Federal Regulation D. After that, there’s a $5 fee for each transaction from the bank.

You cannot open a Performance Checking account online. Use BancorpSouth’s Find a Branch tool to locate a branch near you and sign up in person.

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BancorpSouth Select Savings

This account has a higher minimum balance requirement to open an account and avoid fees, but it also earns a higher interest rate.
APYMinimum Balance to Earn APY
0.10%$0.01
  • Minimum opening deposit: $1,000
  • Minimum balance to earn APY: $0.01
  • Quarterly account maintenance fee: $15 (waived if you maintain a minimum balance of $1,000)
  • ATM fee: No fee for using BancorpSouth ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call BancorpSouth to ask about current fees associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross-border fee.
  • ATM fee refund: None
  • Overdraft fee: $36 per item

For people with a little more money available to open an account, the Select Savings account pays a higher rate of interest than you’ll get from BancorpSouth’s My Goal Savings account. This account does have a quarterly maintenance fee, but you can avoid it by keeping a minimum of $1,000 in the account.

Per Regulation D, you’re allowed up to six certain withdrawals or transfers each month. After that, there’s a $5 fee for each transaction from the bank.

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BancorpSouth Young Savers Savings

A low-fee alternative for teaching your children how to save.

Call BancorpSouth to learn about the current rates.

  • Minimum opening deposit: $25
  • Minimum balance to earn APY: $0.01
  • Monthly account maintenance fee: $0
  • ATM fee: No fee for using BancorpSouth ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call BancorpSouth to ask about current fees associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross-border fee.
  • ATM fee refund: None
  • Overdraft fee: $36 per item

This account is only available to account holders below 17 years of age and requires a parent or guardian over 18 to be a joint account holder. Once the account holder reaches age 18, the account will convert to a My Goal Savings account.It’s a good account for teaching kids the value of savings because the minimum opening deposit is low, there’s no minimum balance requirement and no monthly service charge.

You’re allowed up to six certain withdrawals or transfer each month, per Regulation D. After that, there’s a $5 fee for each transaction imposed by the bank.

You cannot open a Young Savers Checking account online. Use BancorpSouth’s Find a Branch tool to locate a branch near you and sign up in person.

How to get a Bancop South savings account

You’ll need to provide some basic personal information, such as your name, Social Security number, date of birth, address and driver’s license number. You’ll also need details for your current U.S. checking or savings account to fund your new account. If you don’t already have a U.S. checking or savings account, you’ll have to apply in person at a BancorpSouth location.

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How BancorpSouth’s savings accounts compare

These savings accounts make it easy to avoid monthly or quarterly account maintenance fees, but their interest rates aren’t really that competitive. You’ll earn a better return on your money by opening one of these top online savings accounts.

BancorpSouth’s CD rates

BancorpSouth Certificate of Deposit

Earn a higher rate of return than a standard savings account.

Interest rates are determined at the time of purchase. Call BancorpSouth to discover current rates.

  • Minimum opening deposit: $1,000 – $5,000, depending on maturity
  • Minimum balance amount to earn APY: $1,000 – $5,000, depending on maturity
  • Early withdrawal penalty: Early withdrawal penalties apply. Call BancorpSouth to learn more.

If you want to earn a higher rate of interest and don’t mind tying up your money for anywhere from one to 60-plus months, consider a BancorpSouth CD. The longer the term, the higher the rate.

You can open a CD with BancorpSouth with as little as $1,000, so there’s a low barrier to entry.

You cannot open a BancorpSouth CD online. Use their Find a Branch tool to locate a branch near you and apply in person.

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How BancorpSouth’s CD rates compare

BancorpSouth doesn’t publish their CD rates online, so it’s impossible to know how they compare to the CDs that you can get elsewhere. However, we do like their low opening balance requirements and a variety of maturity terms.

BancorpSouth’s money market account options

BancorpSouth Money Market Select

Earn tiered interest rates based on your account balance.
APYMinimum Balance to Earn APY
0.05%$0.01 - $9,999.99
0.05%$10,000 - $24,999.99
0.05%$25,000 - $49,999.99
0.10%$50,000 - $99,999.99
0.10%$100,000 - $149,999.99
0.15%$150,000 - $499,999.99
0.15%$500,000+
  • Minimum opening deposit: $1,000
  • Minimum balance to earn APY: $0.01
  • Monthly account maintenance fee: $10 (waived if you maintain a $10,000 minimum monthly ledger balance)
  • ATM fee: No fee for using the bank’s ATMs. If you use an out-of-network ATM in the United States, you may be charged a fee by both BancorpSouth and the ATM’s owner. Call the bank to ask about current fees associated with out-of-network ATMs. If you use a foreign ATM, you’ll pay $2 per transaction, plus a 2% cross-border fee.
  • ATM fee refund: None
  • Overdraft fee: $36 per item

You’ll only need $1,000 to open a Money Market Select account, but you’ll need 10 times that amount to avoid the monthly fee mentioned above. If you can clear that hurdle, this is a way to earn a little more interest than you’d get from some of the bank’s checking account options. You’ll have access to unlimited over-the-counter and ATM transaction, but more than six withdrawals during any given month will hit you with a $10 fee per withdrawal.Keep in mind, though, you must have a BancorpSouth checking account to open a Money Market Select account.

How to get BancorpSouth’s Money Market Select account

You’ll need to provide some basic personal information, such as your name, Social Security number, date of birth, address and driver’s license number. You’ll also need details for your current U.S. checking or savings account to fund your new account. If you don’t already have a U.S. checking or savings account, you’ll have to apply in person at a BancorpSouth location.

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How BancorpSouth’s money market accounts compare

This account has a low opening deposit requirement, but the interest rates are low, too. You could potentially earn a better rate of return with a money market account from an internet bank.

BancorpSouth’s IRA account options

IRA

BancorpSouth’s IRA lets you save for retirement with flexible contribution options.

Call BancorpSouth the learn the current rates.

  • Minimum opening deposit: Call the bank to learn more
  • Minimum balance to earn APY: Call the bank to learn more
  • Monthly account maintenance fee: None

If you’re under age 70½, you can contribute to an IRA and take advantage of potential tax savings. BancorpSouth’s IRA does not charge a monthly service fee, however, if you need to withdraw funds early, those withdrawals may be taxed as earned income and incur an early withdrawal penalty.

You’ll have to call the bank to learn more about interest rates associated with this account and how to open the account.

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How BancorpSouth’s IRA accounts compare

We don’t know how BancorpSouth’s IRA CDs compare because the bank chooses not to advertise its rates. You’ll have to call to find out. If you do, be sure to compare the rates they’re paying to our list of the top IRA CD rates.

Overall review of BancorpSouth’s banking products

BancorpSouth does offer a wide variety of account options for checking and savings, and while many of their accounts to charge a monthly or quarterly service fee, they make it easy to avoid the fees by maintaining relatively low minimum balances, using your debit card, or using direct deposit.

But if you’re like most people, you probably want to put your money where it will earn the best interest rate. If that’s the case, BancorpSouth might not be the best option for you because their interest rates just aren’t competitive with those offered by other banks. With many of its rates not published online, the bank doesn’t make it easy for you to shop around.

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401(k) Beneficiary: How It Works and What to Consider When Naming One

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

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A 401(k) beneficiary is the person (or persons) who will receive the money in your retirement account upon your death. That sounds pretty simple, but there are several things about naming a beneficiary that you should know — especially if you’re married, divorced or considering naming your children as beneficiaries. We will walk you through the ins and outs of picking a beneficiary, as well as what happens if you don’t.

What is a 401(k) beneficiary?

When you enroll in a 401(k) plan at work, you’ll often complete a form naming your beneficiaries. You’ll be asked to name at least two people: a primary beneficiary and a contingent (or secondary) beneficiary:

  • Primary beneficiary. Your primary 401(k) beneficiary is your first choice to receive your retirement assets in the event of your death.
  • Contingent beneficiary. Your contingent, or secondary, beneficiary is the person (or people) who will receive benefits if your primary beneficiary isn’t alive when you die, or declines to accept the benefits.

You may name more than one person in both the primary and contingent beneficiary categories. If you do, though, you’ll need to specify the percentage each primary beneficiary will receive. The shares don’t have to be equal, but the total must equal 100%. For example, you could name a sibling as a primary beneficiary receiving 80% of the account balance, and two charities receiving 10% each.

What happens if you don’t name a 401(k) beneficiary?

Selecting a 401(k) beneficiary might seem like a formality, but it’s incredibly important if you want to have a say in who inherits your account. If you’re married, your spouse is typically going to be the automatic beneficiary of your 401(k), even if you don’t officially name them on the beneficiary form; there may, however, be some exceptions depending on your plan. But if you’re single, or want someone other than your spouse to inherit your account, naming a beneficiary can prevent a lot of trouble for your heirs. Even if your spouse will be your automatic beneficiary, it may be a good idea to fill out the form for your records.

Typically, retirement accounts avoid the probate process and transfer directly to the named beneficiaries. Probate is a legal process in which the court determines whether a deceased person left a will and ensures the deceased person’s assets are distributed according to their will (or according to state law if the deceased person didn’t have a will).

If you don’t have any living 401(k) beneficiaries when you die, your 401(k) can wind up in probate, and several problems can arise:

  • State law determines who inherits your assets: If you don’t have a will, the probate court uses the state intestate laws to decide how to distribute your assets to heirs.
  • Probate can be costly: The cost of having your assets go through probate varies depending on your estate’s size and makeup, state laws and whether you have a will. However, between court fees, appraisals and attorney fees, probate costs usually range somewhere between 2% to 5% of the value of your assets that go through the process. You can reduce those costs (and ensure more of your assets go to your heirs) by keeping your 401(k) out of the probate process.
  • The transfer of assets may be delayed: If you have a valid beneficiary for your 401(k), your beneficiary can receive the account relatively quickly once your financial institution receives proper notification of your death. The probate process, on the other hand, can take months or even years.

How to pick a beneficiary if…

You’re married

If you’re married, 401(k) beneficiary rules typically consider your spouse as the default beneficiary of your account. Even if you want your spouse to inherit the account and the process will be automatic, your plan administrator might ask you to complete the beneficiary form just as a formality.

If you want to name someone other than your spouse as your beneficiary, your spouse will usually have to sign a spousal waiver agreeing to it. You can get a spousal waiver form from the firm that administers your employer’s 401(k) plan, and the waiver typically needs to be witnessed by a notary or a plan representative.

For example, say you’re married and you don’t want to name your spouse as a 401(k) beneficiary because they are already financially well off. Instead, you’d like to leave the account to your child from a previous relationship. Your spouse must agree to sign the waiver — if they don’t sign the waiver and you list your child as the sole beneficiary, your spouse will still inherit the account, regardless of what your beneficiary designation says.

You’re single

If you’re not married, you can name anyone as your beneficiary without having to have extra documents signed. This could be your children, your parents, siblings, a friend or a favorite charity.

Just remember to update your beneficiary designation if your situation changes. For example, if you name your parents as beneficiaries and they die before you do, you’ll need to update your beneficiary designation to name someone else. If you get married later on, your spouse will likely automatically take precedence over anyone else named as a beneficiary. Thus, you’ll probably need to have them sign a spousal waiver if you want to keep your beneficiaries as is.

Your kids are underage

If you want to name a minor child as a beneficiary, you should consider consulting with an estate planning attorney first. Most 401(k) plans will not transfer money directly to a minor. Instead, a court will have to appoint a trustee or guardian to receive the funds, which can take some time.

There are a few ways to avoid this, and your options may depend on the laws in your state. Some states allow parents to name a minor as a beneficiary and a custodian who will manage the assets in the child’s best interest until they reach a certain age — usually 18 to 25, depending on the state.

Another option is to create a trust. When you create a trust, you also name a trustee who will manage trust assets on behalf of your child — either until they reach a certain age or for their lifetime. Then you would list your child’s trust as your beneficiary. In either case, it’s a good idea to consult with an attorney first to make sure you’re not unintentionally jeopardizing your child’s inheritance.

When to update your beneficiary

You should update your beneficiary designations any time you have a major life event, such as marriage, divorce, separation, a death in the family or the birth or adoption of a child. Of course, it can be difficult to remember to update paperwork amid major life events. For that reason, it’s a good idea to make reviewing your 401(k) beneficiaries something you do annually.

If you do need to update your beneficiary, it will likely take only a few minutes. Most plan custodians allow you to change your beneficiary online in just a few minutes, or print out the paperwork necessary to do so. If you can’t find instructions on your plan’s website, check with the benefits department at your workplace to get the beneficiary designation form and a spousal waiver (if needed).

What taxes will my beneficiaries have to pay on an inherited 401(k)?

Typically, inheritances aren’t taxable income as far as the IRS is concerned (although some states have an inheritance tax, and there is a federal estate tax for very large estates). But that’s not always the case with inherited 401(k) accounts.

If you have a traditional 401(k) (not a Roth account), then your account’s contributions have not yet been taxed. You funded the account with pre-tax income or employer contributions, and the earnings on those contributions have not been taxed either. As a result, when your beneficiary takes withdrawals from the account, those distributions are considered taxable income, and they will need to pay income tax.

Before Jan. 1, 2020, 401(k) heirs had the option of “stretching” payments — and thus the related tax bills — over their life expectancy. But the Setting Every Community Up for Retirement Enhancement (SECURE) Act changed that — now, beneficiaries have to withdraw assets from an inherited 401(k) within 10 years after the account holder’s death.

There are some exceptions:

  • Surviving spouses: A surviving spouse can roll inherited 401(k) funds into an IRA without paying taxes on it. Distributions from that IRA will be taxable when they start taking them in retirement.
  • Disabled or chronically ill individuals: If your beneficiary is disabled or chronically ill, they can take taxable distributions over their lifetime.
  • Minor children: If your beneficiary is a minor child, they must withdraw funds from the inherited 401(k) within 10 years of reaching age 18.
  • Beneficiaries who are less than 10 years younger than the original account owner: This allows beneficiaries (such as siblings, for example) to stretch distributions over their lifetime.

If your beneficiary falls into one of these exception categories, they should talk to a financial advisor or tax professional before withdrawing any funds to ensure to take advantage of any potential tax planning or saving opportunities.

Naming a beneficiary for your 401(k) might seem like an inconsequential part of saving for retirement, but think carefully about who you want to inherit your account if you pass away unexpectedly — then be sure to update your beneficiary forms when things change.

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What Is Tax Avoidance vs. Tax Evasion?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.

Written By

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While both tax avoidance and tax evasion may sound like something that could get you in trouble with the IRS, tax avoidance is legal, while tax evasion is not. Tax avoidance means taking steps to lower your tax bill. Tax evasion, on the other hand, is deliberately paying less than you legally owe.

You’ll learn more below about the difference between tax avoidance vs. tax evasion, and how to avoid having the IRS target you for not paying your fair share.

What is tax avoidance?

Tax avoidance involves taking deductions, credits and other tax breaks that you’re eligible to claim. So is tax avoidance legal? Yes: Many taxpayers use tax avoidance strategies to lower their taxable income and liability, and it’s perfectly legal. After all, lawmakers created the tax rules that help qualified taxpayers reduce their tax obligations. So if you’re wondering how to not pay taxes legally, tax avoidance is how you can do it.

Tax avoidance can take many forms: It might include minimizing your taxable income, maximizing tax credits and deductions or controlling the timing of income and deductions.

Some specific examples of legal tax avoidance strategies, otherwise known as tax loopholes, include:

  • Making tax-deductible or pre-tax contributions to retirement accounts, such as 401(k)s and IRAs
  • Investing in U.S. savings bonds or municipal bonds that earn tax-exempt interest income
  • Making charitable donations that qualify for a tax deduction
  • Claiming the Earned Income Tax Credit or the Child and Dependent Care Credit
  • Prepaying state and local taxes in December, even though they aren’t due until after year-end, so you can deduct them in the year paid
  • Postponing a year-end bonus until the following year because you expect to be in a lower tax bracket next year
  • Deducting business expenses, such as the business use of your home

What is tax evasion?

Tax evasion is a type of tax fraud that involves intentional, illegal attempts to not pay or underpay the taxes you owe.

Tax laws are complicated, and anyone can make a mistake on their tax return. If the IRS catches your error, it will send you a notice suggesting a correction. If that correction means you owe additional taxes, the IRS will charge penalties and interest on the amount you underpaid.

However, there’s a big difference between making an honest mistake and wilfully committing tax evasion.

Here are a few examples of what’s considered tax evasion:

  • Intentionally underreporting or omitting income: You own a business, and clients pay you via cash, check and credit card. You report the income you receive from checks and credit cards on your tax return because you know there’s a paper trail, but you leave out the income you receive in cash, assuming the IRS can’t trace it.
  • Claiming fake or improper deductions: You’re self-employed and claim personal expenses such as commuting costs, meals, concert tickets, clothing and home decor as business expenses.
  • Falsely allocating income: In addition to your full-time job, you have a side hustle selling handmade home décor. When you make a sale, you ask your customer to make the check payable to your elderly mother, who is in a lower tax bracket.
  • Improperly claiming tax credits: You take the Earned Income Tax Credit by claiming that your child lives with you more than six months out of the year, even though your child lives with your ex-spouse full time.
  • Concealing assets: You earn interest from a bank account in a foreign country, but you don’t report the account to the IRS or pay taxes on the interest income.
  • Not filing tax returns: You try to avoid paying taxes by simply not filing a tax return.

Tax evasion penalties

In addition to collecting the back taxes owed, tax evasion penalties can involve hefty fines and even jail time.

According to the IRS Code, if you’re convicted of felony tax evasion:

  • The IRS can fine you up to $100,000 ($500,000 in the case of a corporation)
  • You can be sentenced to up to five years in prison
  • You may be ordered to pay for the costs of your own prosecution

According to the United States Sentencing Commission, in the 2019 fiscal year, 65% of tax fraud offenders were sentenced to prison, and the average jail time for tax evasion was 16 months.

The difference between tax avoidance and tax evasion

Tax Avoidance vs. Tax Evasion

Tax Avoidance

Tax Evasion

  • Claiming deductions and credits for which you're eligible or finding other legitimate ways to minimize your tax liability.
  • Legal: If you make an honest mistake on your return resulting in a lower tax bill, you must pay the correct tax owed, plus penalties and interest.
  • Examples include common tax planning strategies, such as claiming tax deductions and credits, deferring income and accelerating deductible expenses.
  • Intentional attempts to not pay or underpay the amount of tax you owe.
  • Illegal: If convicted of tax fraud, you must pay the back taxes owed and can be sentenced to up to five years in prison, fined up to $100,000 ($500,000 for corporations) and ordered to pay prosecution costs.
  • Examples include hiding taxable income, over-reporting tax deductions and improperly claiming tax credits. 

How to avoid tax evasion

It costs the IRS time and money to investigate and prosecute tax evasion cases, so they usually reserve those resources for big-time tax cheats.

Tax evasion investigations can originate from several sources:

  • Computer screening: Something about your tax return sends up a red flag in the IRS system, and you receive a notice that the IRS intends to audit your tax returns for a recent number of years (per the IRS, it’s generally the last three years, but no more than six). During the audit, the auditor finds evidence that causes them to believe that you knowingly and willingly evaded your tax obligations.
  • Related examinations: The IRS audits one of your business partners or someone else you have a financial relationship with, and that audit leads them to you.
  • Tips from the public: The IRS accepts reports from individuals who believe another taxpayer isn’t complying with the tax laws.
  • Referrals from other agencies: The majority of tax fraud investigations start when the IRS receives information about possible tax evasion from other federal, state or local agencies or the U.S. Attorney as part of that agency’s investigation into another criminal matter.

Typically, the IRS isn’t going to try to prosecute you for tax evasion if you overestimated the value of your charitable donations by a couple hundred dollars one time. They’re usually looking for large amounts or a pattern of tax dodging that stretches over several years.

As long as you’re not willfully engaging in income tax evasion, your chances of facing tax evasion charges are pretty slim. In fact, in the 2019 fiscal year, the IRS initiated only 1,500 tax fraud investigations and recommended prosecution for 942 cases. Considering the IRS processed more than 253 million federal tax returns and supplemental documents that year, the percentage of taxpayers who face tax evasion charges is very small.

Still, if you’re worried about tax penalties or winding up on the wrong side of an IRS audit, be sure to familiarize yourself with federal and state tax laws, and consider turning the job of preparing your return over to a reputable professional — either online or in person. Professional tax preparers are required to keep up with changing tax laws, and their expertise can help you take advantage of tax avoidance strategies without committing income tax evasion. A financial advisor firm may have tax professionals available to help you lower your taxes while ensuring you are still adhering to all state and federal tax law.

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