PAPERWORK, PAPERWORK

PAPERWORK, PAPERWORK Recent changes to the tax laws and the required minimum distribution rules have made reviewing beneficiary designations for Individual Retirement Arrangements (IRAs) and qualified retirement plans (e.g. 401(k)) a high priority on the list of retirement and estate planning activities. This is especially true today, when more of individuals than ever have recognized the tremendous life and death tax advantages these retirement savings vehicles offer and have begun to amass considerable wealth within them. Yet many individuals who so conscientiously set aside money for to fund their retirement are very often unthinking and hasty when making and reviewing elections for the ultimate distribution of these accounts. The effect poor elections or the failure to make elections has on future distributions is significant. Perhaps the most important election anyone can make is the designation of primary and contingent beneficiaries. The failure to designate appropriate beneficiaries will result in accelerating the rate at which your money must be distributed from your IRA or qualified retirement plan. Thus, the primary benefit, the tax-deferred growth offered by these tax-advantaged vehicles, can be lost. For example, many individuals designate their estate as their IRA beneficiary or fail to designate an IRA beneficiary, which will result in their estate becoming their IRA beneficiary by default. The new laws regulating the required minimum distributions make it clear that when the IRA beneficiary, either by designation or by default, is the estate, the deceased is considered to have had no designated beneficiary. Therefore, if an individual dies before the date they are to begin taking the required minimum distributions, their account must be distributed in full by the end of the fifth calendar year after the date of their death. Alternatively, if they die after the date they were to begin taking the required minimum distributions, the account may be distributed over their remaining life expectancy as of the date of their death. Additionally, many individuals who are covered by a qualified retirement plan have previously designated a child or other person from a younger generation as their beneficiary in order to take advantage of the younger person's longer life expectancy to reduce the amount of the required minimum distribution that must be taken each year. This decision may have been financially sound under the old law as it provided the advantage of deferral that permitted a larger account balance to continue compounding for a greater length of time and ultimately provided a greater benefit for the heirs. However, under the new law, the age of a non-spouse beneficiary will no longer be a factor in calculating the required minimum distribution amount. Also, distributions to a non-spouse qualified retirement plan beneficiary are includable in the beneficiary's taxable income and are not an eligible rollover distribution whereas distributions to a surviving spouse avoid estate tax at transfer and are eligible for rollover to another IRA or qualified retirement plan. Therefore, it is more important than ever to review current IRA and qualified retirement plan elections and make thoughtful elections for the future. Remember, IRA and qualified retirement plan elections should never be set in stone. Various changes in life, such as the makeup of family or wealth, or changes in the relevant tax laws, should trigger a review of these important elections. IRA and qualified retirement plan accounts may be an individual's largest asset. Therefore, it is more important than ever to weed through all the paperwork, make informed and thoughtful elections, and review elections regularly. Of course, this brief discussion raises only a few of the potential issues that should be addressed when reviewing an IRA or qualified retirement plan account. Please work with an experienced financial planner or tax advisor who can help you make the best elections for your individual situation.