Life and Death Planning for Retirement Benefits

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Life and Death Planning for Retirement Benefits

Does your client have after-tax money (basis or “investment in the contract”) in any of his retirement plans or IRAs, and if so how much? Is the best use of the basis to convert the plan to a Roth IRA, or cash out the basis separately, or just leave it where it is? See ¶ 2.2 . Consider any special deals offered by the current plan, such as subsidized early retirement, subsidized joint and survivor annuity with spouse, annuity vs. lump-sum payout, or unique investment options. 2.7.02 Reasons to roll money from one plan or IRA to another Roll from QRP to IRA to improve death benefit options: Many QRPs offer a lump sum as the only form of death benefit; see ¶ 1.5.10 . A lump sum is fine if the beneficiary is the spouse (who can roll it over; ¶ 3.2 ) or a charity (which is income tax-exempt; ¶ 7.5 ). If the beneficiary is a nonspouse individual, or a see-through trust, and the beneficiary wants a life expectancy payout, the beneficiary can arrange to have the lump sum transferred to an inherited IRA after the participant’s death (see ¶ 4.2.04 ), but query whether it is a good idea (during the estate planning phase) to count on the future occurrence of such post-death transfers. Also the post-death transfer option is not even available for an estate or non-see-through trust. By rolling benefits over to an IRA while still alive, the participant assures the availability of a deferred payout for all his beneficiaries (without the necessity and attendant risks of a “beneficiary rollover”), but takes away the option of a post-death Roth conversion by a nonspouse Designated Beneficiary (see ¶ 4.2.05 ). ...Or eliminate spousal rights: A person about to marry might roll QRP benefits to an IRA to avoid having federal spousal rights attach to the QRP benefits (see ¶ 3.4 ); unlike the QRP benefits, the IRA could be protected from state-law spousal rights via a prenuptial agreement. A married person can withdraw from a “REA-exempt” profit sharing plan without spousal consent, and roll the distribution to an IRA that is not subject to federal spousal rights; see ¶ 3.4.03 . Participant under age 59½: Many of the exceptions to the 10 percent penalty on pre-age- 59½ distributions (see Chapter 9) apply only to certain types of plans, or apply differently depending on the type of plan. Thus a participant under age 59½ might roll money from a QRP to an IRA to use the “SOSEPP exception” (¶ 9.2) , which is easier to implement in an IRA, or the first-time-homebuyer ( ¶ 9.4.09 ) or higher-education-expenses ( ¶ 9.4.08 ) exceptions, which are only available for IRAs. However, an employee retiring at age 55 or older should not roll to an IRA if he wants to use the “early retirement” exception ( ¶ 9.4.04 ), which is available only for QRPs. Participant approaching or past age 70½: For use of a rollover to prevent or stop RMDs, see ¶ 1.2.06 (D). Investment considerations. An IRA cannot own life insurance or make a loan to the participant, whereas a QRP can do these things. Universal considerations: Some participants stay in (or leave) a QRP because the investment options and/or maintenance costs are better (or worse) than they would be in an IRA. Also, always consider state income tax effects; a few states offer income or estate/inheritance tax breaks for particular types of retirement plans, so rolling from one type of plan to another could destroy (or improve) the state income tax treatment. An individual concerned about possible creditors’ claims should consider which type of plan is best protected; there is no universal answer to that question. While all tax-favored retirement plans receive a complete or nearly complete