Life and Death Planning for Retirement Benefits

Chapter 8: Investment Issues; Plan Types

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not guarantee any level of retirement benefits. If the plan’s investments do well, the profits will increase the participant’s account value. If the plan’s investments do poorly, the participant will receive less at retirement. If the plan is self-directed, each participant makes the investment decisions for his own account in the plan, from a menu of alternatives permitted by the plan. The menu may be broad or may be limited to a few mutual funds. If the plan is not self-directed, the investments are determined at the plan level by the trustee of the plan.

Designated Roth account (DRAC). See ¶ 5.7 .

ESOP (Employee Stock Ownership Plan)

An ESOP is a QRP primarily designed to invest in stock of the sponsoring employer. § 4975(e)(7). ESOPs have various liberalized rules compared with other retirement plans, most of which are of interest only to the employer-sponsor and not to estate planners. Distributions of company stock to the participant or beneficiary from an ESOP or any other retirement plan may be eligible for certain favorable tax treatments if various requirements are met; see ¶ 2.5. Dividends paid to the employee on employer stock held in the ESOP are entitled to certain special rules: They do not count as distributions for purposes of determining whether an employee has received a “lump sum distribution”; see ¶ 2.4.05 . They are not subject to mandatory income tax withholding; see ¶ 2.3.03 . They do not count towards fulfilling the minimum distribution requirement; see ¶ 1.2.02 (C). An IRA is a private, one-person retirement account that is created under, and given special tax benefits by, § 408 . An IRA can be structured either as a custodial account (most common) or as a trust (in which case it may be called an Individual Retirement Trust or Trusteed IRA ; see ¶ 6.1.07 ). § 408(a) , (h) . If the IRA is funded by direct contributions from the participant’s employer it is a SEP or SIMPLE; see ¶ 8.3.13 . For other ways to fund an IRA see ¶ 5.3.02 (regular contributions) and ¶ 2.6 (rollovers); see also ¶ 5.3.01 . IRAs created under § 408 are called traditional IRAs when necessary to distinguish them from Roth IRAs (created under § 408A ). There is no separate type of retirement plan called a “ stretch IRA ”; that’s just a term sometimes used to refer to any IRA that is being paid out gradually over the life expectancy of a beneficiary (see ¶ 1.5.05 ). A Keogh plan (also called an H.R. 10 plan ) is a QRP that covers one or more self- employed individuals. Thus, a Keogh plan is a QRP established by an unincorporated employer (partnership or sole proprietor) for the benefit of the partners and employees of the partnership, or for the benefit of the sole proprietor (and his employees, if any). Any type of QRP other than an ESOP or stock bonus plan may be a Keogh plan. While the term “Keogh plan” (which never appears in the Code) is still used by self- employed persons to describe their retirement plans, most of the once-numerous distinctions between plans adopted by corporations and plans adopted by the self-employed were eliminated Individual Account Plan. Defined Contribution Plan. ¶ 8.3.05 . Individual Retirement Account (IRA) ; stretch IRA Keogh plan