In a prior article, I discussed options for retirement plan and IRA distributions. This is a complex subject, one that requires the coordination of financial and tax planning. While some people will outlive their retirement accounts, many will not, leaving a balance to be distributed to beneficiaries. This article discusses planning for the disposition of account balances remaining at the account owner's death.

When accounts are opened, either in a qualified retirement plan or an individual retirement account, the account owner is asked to complete a beneficiary designation form. In qualified defined contribution plans, those participants who are married are required to name their spouse as the beneficiary, unless the spouse agrees to naming a different beneficiary. My experience with clients and colleagues has been that most of the designation forms are lost. If you cannot obtain a copy of your beneficiary designation form, it is a good idea to file a new one, and to give a copy to your estate planning lawyer. These forms are a type of will. Just as you should review your will every five years, you should do the same with your beneficiary designations for retirement plans and IRAs.

While it is not required by law that the spouse be named as the beneficiary of IRAs, most IRA owners will name their spouses. The owner may also name contingent beneficiaries, in case the spouse does not survive the owner. Even if the spouse survives the owner, the spouse may decide that he or she does not want or need some or all of the benefits, in which case a disclaimer may be used to transfer the benefits to the next generation.

It is not difficult to imagine, however, that this distribution plan could cause problems if there is a second spouse as the primary beneficiary and children of the first spouse as the contingent beneficiaries. The spouse as beneficiary of an IRA or retirement plan has the right to convert it to his or her own, and consequently to name different beneficiaries than those selected by the owner. Careful planning, then, is needed when the spouse is not the parent of the children named as the contingent beneficiaries.

In addition to naming individuals as outright beneficiaries of retirement plans, an account owner may name a trust as the beneficiary of retirement plans or IRAs. This might be an appropriate choice in the second marriage situation described above, because the trust could be structured to limit the spouse's rights. The trust could also be a vehicle to limit distributions to children or grandchildren, or to deal with beneficiaries with special needs. Although beneficiaries generally have a long number of years to withdraw amounts to which they are entitled, which allows for some valuable tax planning, the result of giving beneficiaries discretion is often a much faster payout, over one or two years. The trust vehicle can be an effective way of enforcing some financial discipline on spouses and succeeding generations.  These few paragraphs on beneficiary choices and distribution options summarize very briefly a planning process that requires careful attention to the financial and family circumstances of the account owner. No solution fits every situation, and solutions offered as general advice to the public should not be the sole basis for decision making. In fact, the leading treatise on planning for retirement benefits takes over 500 pages to describe the applicable rules.

It will generally be the case that distributions to beneficiaries will be considered taxable as ordinary income for federal income tax purposes. For most people, retirement distributions to beneficiaries will not be subject to Pennsylvania Personal Income Tax. There is an exception to the federal income tax rules for Roth IRAs (and Roth 401(k)s). Whether a person should make use of Roth planning is a complex question. Here is my shorthand view, with which others might disagree: if you will not need some of your retirement benefits for the rest of your life, putting them in a Roth account might be a good choice. If you think you will need the funds to live on in retirement, Roth is not a good choice. Again, a very general rule to deal with a topic that affects people differently based on their circumstances.

I hope this series of articles on retirement have been helpful in planning your own retirement; and that you have a greater understanding of the various topics included in the term retirement planning. Whether you want to continue working full-time or part-time or step into other opportunities, the key is to understand the issues to be faced and to make informed decisions based upon your personal situation and that of your family, recognizing that at least some aspects of the plan will and should change over time. There are many resources available to help you plan for a comfortable and fulfilling retirement, and you need to devote as much effort to planning this stage in your life as you did in planning your education and your career. If you do, you will reap the rewards of your career of hard work and achievement, whatever you want them to be.  As a poet with a name similar to mine wrote: “The world is so full of a number of things, I'm sure we should all be as happy as kings.”

Robert H. Louis is a partner in the estate planning and administrations practice. He assists clients in preserving and passing on wealth and business ownership across the generations. Contact him at [email protected].

In a prior article, I discussed options for retirement plan and IRA distributions. This is a complex subject, one that requires the coordination of financial and tax planning. While some people will outlive their retirement accounts, many will not, leaving a balance to be distributed to beneficiaries. This article discusses planning for the disposition of account balances remaining at the account owner's death.

When accounts are opened, either in a qualified retirement plan or an individual retirement account, the account owner is asked to complete a beneficiary designation form. In qualified defined contribution plans, those participants who are married are required to name their spouse as the beneficiary, unless the spouse agrees to naming a different beneficiary. My experience with clients and colleagues has been that most of the designation forms are lost. If you cannot obtain a copy of your beneficiary designation form, it is a good idea to file a new one, and to give a copy to your estate planning lawyer. These forms are a type of will. Just as you should review your will every five years, you should do the same with your beneficiary designations for retirement plans and IRAs.

While it is not required by law that the spouse be named as the beneficiary of IRAs, most IRA owners will name their spouses. The owner may also name contingent beneficiaries, in case the spouse does not survive the owner. Even if the spouse survives the owner, the spouse may decide that he or she does not want or need some or all of the benefits, in which case a disclaimer may be used to transfer the benefits to the next generation.

It is not difficult to imagine, however, that this distribution plan could cause problems if there is a second spouse as the primary beneficiary and children of the first spouse as the contingent beneficiaries. The spouse as beneficiary of an IRA or retirement plan has the right to convert it to his or her own, and consequently to name different beneficiaries than those selected by the owner. Careful planning, then, is needed when the spouse is not the parent of the children named as the contingent beneficiaries.

In addition to naming individuals as outright beneficiaries of retirement plans, an account owner may name a trust as the beneficiary of retirement plans or IRAs. This might be an appropriate choice in the second marriage situation described above, because the trust could be structured to limit the spouse's rights. The trust could also be a vehicle to limit distributions to children or grandchildren, or to deal with beneficiaries with special needs. Although beneficiaries generally have a long number of years to withdraw amounts to which they are entitled, which allows for some valuable tax planning, the result of giving beneficiaries discretion is often a much faster payout, over one or two years. The trust vehicle can be an effective way of enforcing some financial discipline on spouses and succeeding generations.  These few paragraphs on beneficiary choices and distribution options summarize very briefly a planning process that requires careful attention to the financial and family circumstances of the account owner. No solution fits every situation, and solutions offered as general advice to the public should not be the sole basis for decision making. In fact, the leading treatise on planning for retirement benefits takes over 500 pages to describe the applicable rules.

It will generally be the case that distributions to beneficiaries will be considered taxable as ordinary income for federal income tax purposes. For most people, retirement distributions to beneficiaries will not be subject to Pennsylvania Personal Income Tax. There is an exception to the federal income tax rules for Roth IRAs (and Roth 401(k)s). Whether a person should make use of Roth planning is a complex question. Here is my shorthand view, with which others might disagree: if you will not need some of your retirement benefits for the rest of your life, putting them in a Roth account might be a good choice. If you think you will need the funds to live on in retirement, Roth is not a good choice. Again, a very general rule to deal with a topic that affects people differently based on their circumstances.

I hope this series of articles on retirement have been helpful in planning your own retirement; and that you have a greater understanding of the various topics included in the term retirement planning. Whether you want to continue working full-time or part-time or step into other opportunities, the key is to understand the issues to be faced and to make informed decisions based upon your personal situation and that of your family, recognizing that at least some aspects of the plan will and should change over time. There are many resources available to help you plan for a comfortable and fulfilling retirement, and you need to devote as much effort to planning this stage in your life as you did in planning your education and your career. If you do, you will reap the rewards of your career of hard work and achievement, whatever you want them to be.  As a poet with a name similar to mine wrote: “The world is so full of a number of things, I'm sure we should all be as happy as kings.”

Robert H. Louis is a partner in the estate planning and administrations practice. He assists clients in preserving and passing on wealth and business ownership across the generations. Contact him at [email protected].