31 January 2009
For clients that have met with me lately they know we have been asking about how beneficiaries are set up on retirement plans (401(k), 403(b), IRA, 457). We have seen mistakes that include everything from having a former spouse listed as a beneficiary, to parents that have passed away, to one child but not another or even a high school sweetheart. These are all mistakes because under current law, the beneficiary designation on an account supersedes a will or trust document.
The opportunities in retirement accounts now lie in the ability to stretch taxes out over a long period of time. In the past, when a non-spouse was named as a beneficiary, they had to take the money, at most, over five years. This would cause large tax bills in those years since it made taxable income higher. Now, however, a non-spouse beneficiary (i.e. your children) can take distributions from inherited retirement accounts over their lifetime (using actuarial tables the IRS produces). This will “stretch” the tax bill out over a longer period of time and thus, keep it lower each year. In the end, this could leave a lot more money to non-spouse beneficiaries.
Spousal beneficiaries on the other hand are still under the same rules as they were previously – they can roll retirement accounts into their name and delay distributions until they turn 70 ½.
The planning opportunity here is to name a spouse as the primary beneficiary and children – or other non-spouse – as the secondary beneficiary. If something happened to you and your spouse, the secondary beneficiary designation kicks in. Also, if your spouse deems that they have enough assets and do not need your retirement plan, they could disclaim it (effectively saying they do not want the money) and the secondary beneficiary kicks in, thus allowing it to not be included in your spouses estate.
One caveat in all this, talk to your attorney to make sure your estate documents are written to allow this. Sometimes your goals might be to have the retirement assets put into trusts versus listing outright beneficiaries – that is a lot trickier to do so an attorney should always be involved. If done properly, you can pass wealth on for the next generation and help them in their retirement too.