We all are saving for retirement and hopeful we will save enough to do all of the things we could not do while working. This post is making the assumption that you saved more than enough to make it through retirement. What happens to your retirement account after you are not there to spend it?
The Federal Government wanted to create tax-favored retirement plans, but it did not want those same plans to an estate-building plan to transfer wealth to the next generation. So, to hinder retirement plans from being able to become an estate-building plan Congress passed a law requiring certain annual distributions from these plans beginning at age 70 1/2 or, death, whichever happens first. This law and related regulation are referred to the “minimum required distribution rules” or “MRD rules.” The MDR is the amount that must be distributed under these rules in a particular year.
These retirement plans are very attractive because of the ability to accumulate funds inside the plan tax-deferred (or tax-free, in the case of a “Roth” plan). The MRD rules dictate when this tax-sheltered accumulation must end. Despite the apparent goal of the MRD rules (making sure tax-favored retirement plans are used for retirement income), the law still allows for your retirement account to stay in existence long past your death if you leave it to the right kind of beneficiary. If certain requirements are met, your retirement benefits can be paid out slowly over your beneficiary’s life expectancy.
The financial benefit of long-term deferral of distributions can be significant. Depending on the investment return, if the beneficiary is young, and takes no more than the MRD each year the value of the inherited plan can soar, under the life expectancy payout method.
Example: A 38-year-old beneficiary who inherits a $500,000 traditional IRA and withdrawals using the life expectancy method will have $1,696,000 inside the IRA in 30 years. And, if the withdrawals are reinvested the beneficiary would have close to $1,500,000 outside the IRA. This example assumes an 8% constant investment return on all assets and a 36% tax rate on all plan distributions and outside investment income.
Hopefully, you will have more than enough money saved to retire and do all of the things that you want, plus some things that you did not know you wanted. But, do not fail to plan for the scenario that your retirement account outlives you. At King Law, we can help you create an estate plan that fits your needs at a price in you can afford. Our next post will go into greater detail over the requirements and the different ways to meet them.
Benjamin F. King
My goal is to bring issues that are often over looked. But, this blog is not legal advice it is only for general information. Each situation is fact specific.