Retirement Planning: Coordinating with the Client’s Overall Planning Objectives

In a recent newsletter that I sent to planning professionals, we discussed retirement planning. Coordinating retirement plans with wealth transfer planning can be challenging. This is primarily 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 examined some of the critical rules in using IRAs and qualified retirement plans for wealth transfer planning, common misperceptions in this area, and why naming a trust as beneficiary may be the only way to accomplish some of the client’s planning objectives.

I told the professionals and need to reiterate her that completely covering these subjects requires volumes.

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 newsletter is written for professionals. But there is nothing magical about the information. Attached are some of the basics from that newsletter

The Fundamentals
Distribution Calendar Year
A distribution calendar year is a year in which the participant is required to take a distribution from the plan. The first distribution calendar year is the calendar year in which the participant reaches age 70 1/2 (for some employees under some qualified retirement plans, this may be the year in which the participant retires)

Required Beginning Date (RBD)
A special rule applies to the first distribution calendar year. The required distribution for that year may be taken as late as April of the following year, which is called the required beginning date (RBD). Because all other required distributions must be made within their assigned year, the distribution for the second distribution calendar year must be made before December 31 of the year in which the RBD falls.

Minimum Required Distribution (MRD)
In each distribution calendar year, the participant is required to take at least a prescribed distribution, called the minimum required distribution (MRD). The MRD for each distribution calendar year is determined by dividing the prior year-end account balance by a life expectancy factor for the participant that is supplied by the IRS. If the participant’s sole beneficiary is his or her spouse who is more than 10 years younger than the participant, the MRD is calculated using the Joint and Last Survivor Table. Otherwise, the Uniform Lifetime Table, which assumes a joint life expectancy with someone presumed to be ten years younger, is used. Under the Uniform Lifetime Table, a participant who only takes the MRD each year cannot outlive his or her retirement benefits.

Planning Tip: Taking only the MRD also means that the account will probably grow for years past the RBD. For example, if an IRA is growing at a rate of 5.5%, at age 100, the participant will still have about 60% of the original account balance is still in the account. Planning for the beneficiaries, therefore, is very important.

We won’t bury 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.

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