Retirement Planning

The Law Offices of Michael J. Wittick, P.L.C. can help you coordinate your retirement planning with your estate planning, a very important and often misunderstood juncture. Mr. Wittick has been teaching retirement planning as it relates to estate planning to advisors for many years.

To fully appreciate this area, one must understand that America’s retirement assets are reaching record highs nearly every year. Recently published information indicates that retirement assets now account for almost 40% of all household financial assets and the percentage is increasing every year. Furthermore, your tax deferred retirement plans are subject to estate tax at a 2008 rate of 45% and income tax at a maximum rate of 35%.

Income Tax Deferral Goals

An IRA or any tax deferred retirement plan allows the principal to grow tax free until it is withdrawn. Please reference our chart on the Advantage of Tax Deferred Accumulation which most people find counter intuitive because they wouldn’t expect that $1 invested and doubled each year for 20 consecutive years without tax would total as much as $1,048,576.00 whereas $1 doubled each year in a 28% tax bracket totals only $51,353.37 after 20 years. That is the advantage of tax free growth. And the belief of some that the full balance of the IRA is immediately subject to income tax upon death is a myth even though there certainly are mistakes in planning that can cause this result. You not only can but probably should “stretch out” the withdrawals from your IRA balance as long as possible to preserve the tax free growth. Please reference the IRA Distribution Flowchart from nationally renown retirement plan specialist, Robert Keebler, to learn of the multitude of withdrawal options from an IRA, dependent upon who is the designated beneficiary, only some of which allow the benefits to be “stretched out.” At the bottom of the first page, this chart also shows that the benefits may be stretched out over the life expectancy of the beneficiary, which can be referenced below under Retirement Strategy #1.

It is important to remember that the selection of designated beneficiary affects not only after death income taxation but estate taxation as well, discussed under Retirement Strategies # 1, 2 and 3 below. Incorrect beneficiary designation can also result in unintended beneficiaries or minor beneficiaries receiving all of the plan proceeds at age 18.

The multitude of options visible in the above IRA Distribution Flowchart are enough to send anyone running for qualified advice. These options, created by the Internal Revenue Code and the Internal Revenue Service regulations, are complicated further when you learn that if you withdraw from your IRA too soon (before 59 1/2) there is a premature distributions penalty in the form of a 10% excise tax of the minimum required distribution amount (MRD) and if you withdraw too little (less than the MRD) there is another penalty in the form of a 50% excise tax on the undistributed MRD amount.

Personal Planning Goals

Please reference our guide to some potential planning benefits which includes a subheading on personal planning goals. Most, if not all of those goals apply to your retirement plan. For example, while healthy, the IRA owner is in control of the IRA, but when the owner becomes disabled, he or she needs a durable power of attorney that is acceptable to the custodian of the IRA, to control important decisions such as contributions, payment options, rollovers or conversions, investment of the assets, and beneficiary designations. Or, will the owner of the IRA mind if the spouse is the designated beneficiary and gets remarried after the owner’s death ? Maybe not if it is not a blended family but in a second marriage with each spouse having children by prior marriages, this can be a critical issue because the IRA benefits may very well go to beneficiaries not intended by the original owner. Or, will the owner mind if the beneficiary of the IRA has poor spending habits, loses the benefits to a divorce, or is unable to effectively manage the benefits due to being a minor, elderly or disabled ? Or, do the owner or beneficiaries of the IRA need protection from creditors ? I think you would agree that these issues could be even more important than taxes to some.

Estate Tax Goals

Please reference Practice Area: Tax Planning which explains in more detail that you will want to defer federal estate tax by preserving the unlimited marital deduction or rolling over your IRA to your spouse. You will also want to avoid federal estate tax by preserving your federal estate tax exemption or, if married, by doubling that exemption.

Advisor Goals

The importance of discussing your retirement planning options with your financial advisor, CPA and estate planning attorney cannot be overstated. Proper retirement plan strategy requires not only that you master your options under the plan document but that you name multiple beneficiaries, primary and contingent, build a professional team that you trust and review your IRA with your team on a regular basis. Unfortunately, too often these advisors are not coordinated, give confusing signals, have different goals and/or there is no planning process between them.

Summary of Disadvantages of Retirement Plan Assets

• Ordinary Income Tax on Distributions
• Death Benefits Subject to Income in Respect of a Decedent tax
• Included in Estate Tax
• Many Clients don’t spend
• Can’t Give Away Without Gift & Income Tax
• Combined Income & Estate Tax Can Exceed 70%

Retirement Planning Strategies

Retirement Plan Strategy #1: “Stretch-out IRA”

• Provides Maximum Long-Term Income Tax Deferral
• Keeps all Retirement Plan Proceeds in the Family
• Stretch out over Life Expectancy of each beneficiary under Separate Share Rule
• Spousal Roll Over
• IRA Trust to maximize the stretch out, do estate tax planning and protect from creditors & mismanagement. Reference Reasons to Consider an IRA Trust

Retirement Plan Strategy # 2: "Spend Down, Reposition or Convert”

• Spend down while alive since IRAs are bad assets to die with
• Reposition into more favorably taxed assets
• Leverage through investment of distributions into life insurance which is income tax free and can be estate tax free inside Irrevocable Life Insurance Trust
• Convert to Roth IRA:
  • Qualified Distributions are income tax free
  • No MRDs until death
  • Passes Income Tax Free at Death

Retirement Plan Strategy # 3: “Charitable Planning with Testamentary CRT”

• Estate and Income Tax Deduction
• No IRD
• Lifetime income
• Convert ordinary income to capital gain rate
• Eliminates MRD Requirements but maintain tax deferral
• Replace Gift to Charity with Life Insurance

For those interested in more detail on the above issues, please feel free to refer to Mr. Wittick’s presentation entitled Maximizing Your Retirement Plan Savings.