Retirement plans (ie pension plans, 401(k) plans, employer-based IRAs, etc.) account for the bulk of assets for most Americans. Plans that meet certain legal requirements set forth by the federal ERISA law enjoy favorable tax treatment to promote growth and provide a comfortable retirement for the account owner. For example, the account owner is allowed to defer taking any distribution from their retirement account until the calendar year in which they turn age 70½, allowing the account to grow tax-free during that period. intermediate. period. Once the account owner reaches age 70½, he must begin receiving minimum required distributions (MRDs) and those distributions are subject to income tax.
However, the tax advantages of retirement accounts are not intended to benefit heirs or designated beneficiaries after the account owner dies, with one exception. If the account owner has designated his or her spouse as the beneficiary of the retirement account, after the account owner’s death, the surviving spouse may either transfer the deceased’s account to your own account Prayed remain as the beneficiary of the deceased’s account and postpone receiving distributions until the calendar year in which the deceased spouse would have reached age 70½.
However, estate planning becomes more complex when the beneficiaries of the retirement plan are people other than the surviving spouse. In that case, the beneficiary is required to take MRDs for a period of five years or for the beneficiary’s life expectancy, sometimes called “the extension period.” If a trust is the designated beneficiary of the decedent’s retirement account and all of the trust’s beneficiaries are individuals, MRDs are calculated based on the beneficiary with the shortest life expectancy (ie, the oldest beneficiary).
The whole subject of retirement plans is extremely technical, given the requirements of ERISA and the regulations issued by the Internal Revenue Service. Similarly, incorporating a person’s retirement plan assets into their estate plan can be a complex exercise. Among the issues to consider are the following:
1. How to maximize the extension period so that the assets in the retirement account can continue to grow tax-free for the maximum amount of time;
2. Ensuring that the assets are protected from the beneficiary’s creditors; Y,
3. Provide a structure for the distribution of retirement funds (for example, limit disbursements to prevent a spendthrift beneficiary from wasting their share of the funds at one time).
Be sure to consider the above issues before proceeding with your estate plan.
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