Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

As long as assets stay in the plan, the participant or beneficiary is investing not just “his own” money but also “Uncle Sam’s share” of the participant’s compensation and the plan’s investment profits, i.e., the money that otherwise would have been paid to the IRS (and will eventually be paid to the IRS) in income taxes. Keeping the money in the retirement plan enables the participant or beneficiary to reap a profit from investing “the IRS’s money” along with his own. Once funds are distributed from the plan, they are included in the gross income of the participant or beneficiary, who then pays the IRS its share (see Chapter 2 ). Thereafter the participant or beneficiary will no longer enjoy any investment profits from the government’s share of the plan. Long-term deferral of distributions also tends to produce financial gain with a Roth retirement plan, even though income tax is not being deferred; see ¶ 5.1.01 . Despite the apparent goal of the RMD rules (assuring that tax-favored retirement plans are used primarily to provide retirement income), § 401(a)(9) permits the retirement account to stay in existence long past the death of the participant whose work created the benefit— if the participant leaves his retirement benefits to the right kind of beneficiary. If various requirements are met, the law allows the retirement benefits to be paid out gradually, after the worker’s death, over the life expectancy of the worker’s beneficiary. ¶ 1.5.05 . The financial benefit of the long-term deferral of distributions permitted by the minimum distribution rules puts a premium on naming a beneficiary who will qualify for the life expectancy payout method. Depending on investment returns, if the beneficiary is young, and takes no more than the RMD each year, the value of the inherited plan can soar, under the life expectancy payout method, by the time the beneficiary reaches retirement age. Of course, deferring income taxes is not necessarily beneficial. The individual’s (or beneficiary’s) tax rate could be higher when taxable distributions are withdrawn than the rates that applied when tax-deductible contributions were made to the plan or the plan earned tax-deferred investment profits. Though there are non-tax advantages to these plans (participants are normally less likely spend the money in their retirement plans, thus boosting retirement wealth; there is some creditor protection), financial planning work projecting income and tax rates can pay off when determining how much to contribute to or withdraw from plans. The “Worker, Retiree, and Employer Recovery Act of 2008” (WRERA) (P.L. 110-458) amended § 401(a)(9) by adding the following new subparagraph (H), entitled “Temporary waiver of required minimum distribution”: “The requirements of… [ § 401(a)(9) ] shall not apply for calendar year 2009 to” any defined contribution plan under § 401(a) , § 403(a) or § 403(b) ; any governmental 457 plan; or “an individual retirement plan” (IRA). Notices 2009-9, 2009-5 IRB 419, and 2009-82, 2009-41 IRB 491, provide guidance on § 401(a)(9)(H). Thus, anyone who otherwise would have been required to take a distribution from one of these types of plans in 2009—whether participant or beneficiary—could skip a year. Throughout this Chapter, bear in mind that there was no RMD “for” the year 2009. The one-year suspension generally did not change how post-2009 RMDs are calculated. It did not extend lifetime or post- death life expectancy payouts, or somehow cause the year 2009 to “drop out” of the calculations WRERA suspended RMDs for 2009