An Estate Planner’s View Of Retirement Assets

For most of our retired clients, the largest asset is their retirement plan. Traditional pensions that provide income for life are much less common, but many of our clients are still covered by the Civil Service Retirement System. The Federal Employees Retirement System became effective in 1987 and includes the Thrift Savings Plan that resembles a 401(k).

Most employers have transitioned to a tax-deferral plan that includes 401(k), 403(b), 457(b), SEP and SIMPLE IRA. I am quite familiar with the change as my employer, US Airways, used bankruptcy to jettison the pilot pension plan.

The original purpose of Qualified Retirement Plans was to provide income during retirement. However, regular contributions matched by employers and the rising stock market put the value of the accounts at more than $40 trillion, creating family wealth.

Congress used the Secure Act to slow the continued deferral of tax-free growth by requiring most distributions to children within 10 years. Added are favorable provisions allowing account holders to use their retirement accounts for charitable contributions once they reach 70 and half years of age. One of my father’s sayings was, “The government is very patient but eventually gets its share.”

Patience has been tested, but retirement accounts remain an excellent vehicle for saving for retirement living. They may not be the same legacy asset as your house or your Exxon stock inherited from your grandfather due to future tax obligations.

The following are some of our general rules about dealing with retirement assets including traditional IRA accounts:

• Naming your spouse as the primary beneficiary is generally the best tax move.
• To get asset protection for your children, you can name a trust as the beneficiary. However, to avoid higher trust tax rates, the IRA distributions should be distributed to the child.
• Roth IRAs payable to a trust for your child do have required minimum distributions, but the distributions can stay in the trust since there is no tax due for the Roth IRA.
• Consider holding part of your IRA to cover possible “medically necessary” long-term care expenses that are deductible.
• Those deductible long-term care expenses can also provide the opportunity for Roth conversions.
• The surviving spouse should consider moving a TSP or 401(k) to a rollover IRA. The standard rule is that once the surviving spouse dies, the non-spouse beneficiaries have 90 days to request a rollover, or the share will be paid to the beneficiary as taxable income.
• Take your required minimum distributions in the first half of the year. This ensures distributions are complete or the beneficiaries have enough time to take your distribution should the account holder pass away during the year.
• Consider naming a charity as a beneficiary for part of your IRA, as this is the most tax-efficient way to support the organizations that make a difference to our community.

We recommend that you consult with your financial planner and certified public accountant on what strategy is right for you.

Steven M. Berger is an accredited estate planner and the founding attorney of the Law Office of Steven M Berger LLC.

These answers are general information and are not intended as legal advice for your individual situation. The Law Office of Steven M Berger LLC is located at 821 West Benfield Road, Suite 1, in Severna Park and can be reached at 410-777-5916 or admin@bergerwills.com.