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.