MAXIMIZING RETIREMENT AND ESTATE PLANNING

A critical asset for many clients is their retirement plan, be it company pension, 401(k) or rollover IRA. Coordinating retirement and estate planning can be difficult due to conflicting income and estate tax regulations. Handled correctly, the retirement plan supports not only your retirement, but also supports your heirs after your death. Handled incorrectly, the plan may support you during your lifetime, but be almost entirely devoured by taxes at your death.

Congress allows tax deferral to support the owner in retirement, not to build assets for heirs. Minimum distribution rules govern how quick (beginning at age 70 ½) money must be paid from a plan. Different distribution calculation methods are sanctioned.

Usually, the owner elects to withdraw funds on a joint (owner/beneficiary ) life expectancy method. Under most IRAs and retirement plans, the "recalculation method" is applied unless another is specifically elected.

This method, most commonly (and mistakenly!) used, assures the least lifetime income tax, but causes income tax on the entire account within one year after death. Because the plan is included in the owner’s estate, total taxation can exceed 80% or more!

For most, less estate tax and longer tax deferral can be obtained by electing the "non-recalculation" method. This little known method assures the client’s plan balance an be used against the $625,000 applicable credit amount (for 1998), and further results in a fixed term of income tax deferral regardless of when death occurs. Its only "downside" is slightly larger minimum lifetime withdrawals. In some cases, the entire balance can be passed estate tax free with the income tax deferred for decades. The difference can mean hundreds of thousands of dollars to the family!

To maximize the benefits of your retirement and estate plans, consult (early!) with professionals comfortable with both income and estate taxation of retirement plans.

THE PAYOFF CAN BE FANTASTIC!