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Irvine, CA Estate Planning Blog

Friday, April 1, 2016

Ensuring Income Tax Deferral for Retirement Plan Beneficiaries

Some of the most generous provisions of the tax code are those that permit beneficiaries of IRAs and other qualified retirement plans to defer income tax on the plans until time of withdrawal. This allows the IRA or qualified plan to grow significantly more than if it were subject to tax on gains each year.

Another equally generous provision of the tax code permits beneficiaries to withdraw only a minimum amount from IRAs or qualified plans each year. By taking only these “required minimum distributions” a beneficiary can stretch out distributions over the better part of his or her lifetime, resulting in further deferral of income tax on the amount remaining in the plan.

Unfortunately, most beneficiaries fail to take advantage of this latter provision and withdraw all of the IRA or qualified plan funds immediately, thereby losing the significant tax advantages of tax-deferred growth.

A past Senate proposal would have required that beneficiaries withdraw the entire IRA or qualified plan within five year’s of the plan participant’s death. Fortunately that Senate proposal died upon arrival, but this is an excellent reminder that retirement plans are assets that need proper planning.  

A common misperception is that one should not name a trust as beneficiary because it’s overly complicated and doesn’t permit a stretch out. While naming a trust does add a thin layer of complexity, making a Retirement Plan Trust a designated beneficiary of a tax deferred retirement plan is an excellent choice to insure the beneficiaries (usually children) will not cash out the benefits and destroy the huge benefit of tax deferred growth and to acquire asset protection for the beneficiary in an accumulation trust.


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Law Offices Of Michael J. Wittick, A Professional Law Corporation is located in Irvine, CA and serves clients with estate and wealth preservation matters throughout Irvine, Lake Forest, Laguna Woods, Laguna Hills, Foothill Ranch, Tustin, Aliso Viejo and the surrounding areas.



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