| |
Retirement
Benefits Planning
IRS
Rules Allow Stretching IRA Distributions
Many clients are
unaware of new IRS rules which allow substantial
IRA Income and Estate Tax savings. I have
summarized the two of the most important changes
below.
1. You no longer
have to choose a death beneficiary in order to
compute your required minimum distribution at age
70 1/2.
As a result of
the new tax law, required minimum distributions,
which still must commence at age 70 1/2, will not
be determined annually by resort to an IRS table.
In any given year you merely divide the previous
year's December 31st balance of Retirement and IRA
investments by the applicable divisor set opposite
your age on the chart to determine the required
minimum distribution. The choice of beneficiary no
longer has anything to do with your required
minimum distribution, in most cases. As an added
bonus, the chart is based upon a joint life
annuity computation with a spouse assumed (for
sake of the table's computation) to be 10 years
younger.
If your spouse is actually more than
10 years younger, the required minimum distribution is
less.
If the
designated beneficiary is someone other than a
spouse, the required minimum distribution is even
lower. In this case, you resort to the same table
but then make an additional computation. You refer
to a second table and multiply the chart
distribution amount by the percentage reflected
opposite the number of years difference shown on
the first chart.
An example:
Plan participant
designates his grandchild who is 22 as his death
beneficiary. At prior year's end the investment
value of all retirement plans combined is $
300,000.
The joint life
table reflects that the required minimum
distribution for the plan participant at age 70
1/2 is:
300,000/26.2 =
$11,450.38
but the death beneficiary is 48.5
years younger, so by resort to the second chart that
number is multiplied by 52% so that the required
minimum distribution is now
$ 5,954.20
This means that
the required minimum distribution is now much
lower than under previous rules. This also means
that the likelihood of a retirement plan death
benefit is much greater.
2. The law now
lets a retirement plan death beneficiary be
designated as late as the close of the year after
the year in which the plan participant dies.
Combined with
the first change, you can now stretch the required
time period over which the death benefit is paid
out substantially longer than under the previous
law.
Under prior law
if there was no designated death beneficiary, the
heirs at law could only stretch the distribution
of the death benefit of a retirement plan over 5
years.
Under the new
law, the default provision stretches the time to
the remaining life expectancy of the plan
participant, as if he had lived to his life
expectancy pursuant to the table.
Under the old
law, if there was a designated beneficiary under
the retirement plan, the distribution of the death
benefit could be stretched over his remaining life
expectancy. This still remains the case.
However, under the new law, a
contingent death beneficiary can be designated to
receive the death benefit remaining (if any) at the
death of the primary death beneficiary. And this
designation can be made as late as the year following
the plan participant's death.
An example: The
Plan participant described above dies, having
designated his grandchild as described above.
After that plan participants death, within the
allowable time, that grandchild files with his
grandparent's plan administrator a contingent
beneficiary designation which designates his
grandchildren living at the time of his death as
contingent beneficiaries to receive any death
befit remaining at grandchild's death.
The net effect,
If at the time of grandchild's death there remains
any portion of the plan participant's plan then
undistributed, it will be distributed to the plan
participant's great grand children over their
remaining life expectancy as determined by
referral to that original chart described in one.
In the first
year of the plan participant's required
distribution in retirement, the plan distributed
2%. You can well imagine the effect of the income
tax deferred compounding inside the retirement
plan, as a result of the reduced required minimum
distribution. Take that and spread it over the
next 4 generations and you can imagine the wealth
building which can accrue.
Needless to say,
the determination of designated death
beneficiaries should be integrated with you
comprehensive estate plan. If you would like to
review your plan take advantage of these new
rules, please call and we will be happy to meet
with you.
|
|
