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  • Writer's pictureRandall Fisher

Retirement Planning Basics, part 3

Two weeks ago we started a discussion about retirement planning and ways that you can coordinate retirement plans with wealth transfer planning. It can be challenging because retirement accounts are driven by income tax laws designed to encourage Americans to accumulate wealth for retirement, not for transferring wealth upon death.

We have been examining some of the fundamentals to understand why naming a trust as beneficiary may be the only way to accomplish some of the client’s planning objectives.

This topic is especially important now as the baby boomer generation begins retiring. At the end of 2010, IRAs and qualified retirement plans held nearly $17.5 trillion, accounting for 37% of all household financial assets. And because of how lifetime minimum required distributions are calculated, IRAs and qualified retirement plans may be the largest assets held at death.

The next fundamental we need to look at is determining the Minimum Required Distribution (“MRD”) for the beneficiary after the plan participant dies. Last time we took a brief look at a “Designated Beneficiary”. The thing to remember about designated beneficiaries is that only an individual or a qualified “look through” trust can be a Designated Beneficiary. Estates, partnerships, corporations, LLCs, other trusts, and charities do not qualify. If there are multiple beneficiaries, all must be individuals and the oldest must be identifiable.

Determining the MRD for the Beneficiary after the Participant Dies When determining the MRD for years after the participant’s death, the critical questions are: (1) Is there a Designated Beneficiary; (2) Did the participant die before or after the Required Beginning Date? and (3) What does the plan provide?

If there is a Designated Beneficiary, regardless of when the participant dies, each beneficiary may use the Designated Beneficiary’s age factor as shown in the government’s Single Life Table to determine his or her MRD unless the plan requires more rapid distribution. Using the Designated Beneficiary’s age is commonly known as a “stretch-out,” and, in most cases, maximum stretch-out results in significantly more wealth passing to the beneficiary.

Using the Life Expectancy Rule, the beneficiary calculates the MRD for the first year by dividing the account balance by the Designated Beneficiary’s life expectancy. Each subsequent year, calculate the MRD by dividing the remaining account balance by the prior year’s divisor minus “1.” Thus, using this method, a beneficiary will withdraw all of the retirement benefits by the life expectancy of the Designated Beneficiary, even if taking only the MRD each year.

Death before Required Beginning Date If the participant died before his or her RBD and there is no Designated Beneficiary, distributions must comply with the Five-Year Rule unless the plan requires more rapid distribution.  Under the Five-Year Rule, the entire plan balance must be distributed by December 31 of the year containing the fifth anniversary of the participant’s death. Annual distributions are not required. If there is a Designated Beneficiary, use of the Five-Year Rule is optional unless the plan provides otherwise.

Planning Tip: The Five-Year Rule only applies if the participant dies before his or her required beginning date.

If you have questions, give us, or your neighborhood financial planner a call. If you don’t have a neighborhood financial planner, get one you trust. It will be the best move you ever make. If you need help finding one, give us a call. We’ll help you look. You can find out how to reach us at our website:

As for all the details about retirement planning, we won’t bury you with details here, but will continue the discussion in future postings. If you would like to keep updated. Subscribe to the blog so that you will receive additional suggestions.

As always, good luck and good hunting.

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