Assisting individuals and families coordinate retirement planning as part of comprehensive estate plans, along with financial advisors.
The Law Offices of Michael J. Wittick, P.L.C. can help you coordinate your retirement planning with your estate planning, a very important and often misunderstood juncture. Mr. Wittick has been teaching retirement planning as it relates to estate planning to advisors for many years.
To fully appreciate this area, one must understand that America’s retirement assets are reaching record highs nearly every year. Recently published information indicates that retirement assets now account for almost 40% of all household financial assets and the percentage is increasing every year. Furthermore, your tax deferred retirement plans are subject to estate tax at a 2008 rate of 45% and income tax at a maximum rate of 35%.
Please reference our synopsis of the Collision of Retirement Planning Goals: 1) Income Tax Deferral Goals 2) Personal Planning Goals 3) Estate Tax Goals 4) Advisor Goals.
Income Tax Deferral Goals
An IRA or any tax deferred retirement plan allows the principal to grow tax free until it is withdrawn. Please reference our chart on the Advantage of Tax Deferred Accumulation which most people find counter intuitive because they wouldn’t expect that $1 invested and doubled each year for 20 consecutive years without tax would total as much as $1,048,576.00 whereas $1 doubled each year in a 28% tax bracket totals only $51,353.37 after 20 years. That is the advantage of tax free growth. And the belief of some that the full balance of the IRA is immediately subject to income tax upon death is a myth even though there certainly are mistakes in planning that can cause this result. You not only can but probably should “stretch out” the withdrawals from your IRA balance as long as possible to preserve the tax free growth. Please reference the IRA Distribution Flowchart from nationally renown retirement plan specialist, Robert Keebler, to learn of the multitude of withdrawal options from an IRA, dependent upon who is the designated beneficiary, only some of which allow the benefits to be “stretched out.” At the bottom of the first page, this chart also shows that the benefits may be stretched out over the life expectancy of the beneficiary, which can be referenced below under Retirement Strategy #1.
It is important to remember that the selection of designated beneficiary affects not only after death income taxation but estate taxation as well, discussed under Retirement Strategies # 1, 2 and 3 below. Incorrect beneficiary designation can also result in unintended beneficiaries or minor beneficiaries receiving all of the plan proceeds at age 18.
The multitude of options visible in the above IRA Distribution Flowchart are enough to send anyone running for qualified advice. These options, created by the Internal Revenue Code and the Internal Revenue Service regulations, are complicated further when you learn that if you withdraw from your IRA too soon (before 59 1/2) there is a premature distributions penalty in the form of a 10% excise tax of the minimum required distribution amount (MRD) and if you withdraw too little (less than the MRD) there is another penalty in the form of a 50% excise tax on the undistributed MRD amount.
Personal Planning Goals
Please reference our guide to some potential planning benefits which includes a subheading on personal planning goals. Most, if not all of those goals apply to your retirement plan. For example, while healthy, the IRA owner is in control of the IRA, but when the owner becomes disabled, he or she needs a durable power of attorney that is acceptable to the custodian of the IRA, to control important decisions such as contributions, payment options, rollovers or conversions, investment of the assets, and beneficiary designations. Or, will the owner of the IRA mind if the spouse is the designated beneficiary and gets remarried after the owner’s death ? Maybe not if it is not a blended family but in a second marriage with each spouse having children by prior marriages, this can be a critical issue because the IRA benefits may very well go to beneficiaries not intended by the original owner. Or, will the owner mind if the beneficiary of the IRA has poor spending habits, loses the benefits to a divorce, or is unable to effectively manage the benefits due to being a minor, elderly or disabled ? Or, do the owner or beneficiaries of the IRA need protection from creditors ? I think you would agree that these issues could be even more important than taxes to some.
Estate Tax Goals
Please reference Practice Area: Tax Planning which explains in more detail that you will want to defer federal estate tax by preserving the unlimited marital deduction or rolling over your IRA to your spouse. You will also want to avoid federal estate tax by preserving your federal estate tax exemption or, if married, by doubling that exemption.
Advisor Goals
The importance of discussing your retirement planning options with your financial advisor, CPA and estate planning attorney cannot be overstated. Proper retirement plan strategy requires not only that you master your options under the plan document but that you name multiple beneficiaries, primary and contingent, build a professional team that you trust and review your IRA with your team on a regular basis. Unfortunately, too often these advisors are not coordinated, give confusing signals, have different goals and/or there is no planning process between them.
Disadvantages of Retirement Plan Assets
- Ordinary Income Tax on Distributions
- Death Benefits Subject to Income in Respect of a Decedent tax
- Included in Estate Tax
- Many Clients don’t spend
- Can’t Give Away Without Gift & Income Tax
- Combined Income & Estate Tax Can Exceed 70%
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