Life and Death Planning for Retirement Benefits

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Chapter 5: Roth Retirement Plans 275
is higher than zero; then his choice is between a deductible traditional IRA contribution (which
could save him some current income taxes) and the nondeductible Roth IRA contribution. He
should consider the factors discussed at in making this choice.
B. Traditional CODA account vs. DRAC. Which participants in a cash-or-deferred
arrangement (CODA) plan should choose the DRAC By choosing the DRAC, the
individual gives up the immediate tax savings of having the contribution excluded from his
income in exchange for the hope of tax-free distributions later. The choice could be made
considering whichever of the factors listed in are applicable.
Eric Example: Eric has a choice of building his savings either inside or outside retirement plans.
He prefers to maximize his savings inside tax-favored retirement plans, because he believes such
savings are safer from potential creditors and from his own tendency to overspend. He also finds
investing easier inside a retirement plan, because there is no need to track the cost basis and holding
period of each investment. He figures that by contributing $15,000 to a traditional 401(k) he’s
really stashing away only about $10,000, because (based on his income tax bracket) the plan
“owes” the government roughly 33 percent income tax on the contribution. He will have to pay
that “debt” when he withdraws money from the traditional plan. With a Roth account, he is in
effect increasing his plan contribution. Contributing $15,000 to a Roth plan is equivalent to
contributing $22,500 to a traditional plan.
5.8.06 Roth plans and the estate plan
Here are matters the estate planner needs to consider in connection with a client’s Roth
plans or conversions.
Note: Though qualified distributions from Roth IRAs and DRACs are exempt from income
tax, these accounts are not exempt from estate tax; they are includible in the participant’s gross
estate just as traditional plans and IRAs are (see .
A. Choice of death beneficiary. Roth benefits generally should not be left to charity; there is
no point in prepaying the income taxes on money being left to a tax-exempt entity. This
principle may require an individual who participates in a CODA plan to designate different
beneficiaries for his DRAC and traditional accounts in the plan. See Form 3.7,
A Roth plan could ease the problems of leaving retirement benefits to a “qualified domestic
trust” (QDOT; for the benefit of a noncitizen spouse, as compared with leaving
traditional (taxable) benefits to such a trust. Many of the problems of leaving traditional retirement
benefits to a trust for a noncitizen spouse arise from the fact that such benefits are taxable as income
in respect of a decedent; see the Special Report: Retirement Benefits and the Marital Deduction
(Including Planning for the Noncitizen Spouse) . The Roth plan eliminates this
problem.
By leaving Roth plan death benefits (rather than traditional plan death benefits) to his
grandchildren (or to a “see-through trust” for their benefit), the participant gives his beneficiaries
the advantage of long-term tax-free investment accumulations and does not “waste” any of the
GST exemption (se paying income taxes. For economic advantages of a “stretch” payout
of a retirement plan to young beneficiaries, see for how to achieve a stretch payout for a
trust named as beneficiary, see ¶ 6.3.