IRAs and other “Qualified Plans”, such as 410ks and SEPs, are quickly becoming the main asset of many of my clients. In the past the primary asset in an estate would likely be life insurance or real estate, which are not subject to income tax. Having such a large part of an estate being pre-tax (subject to income tax) creates complex planning issues that have to be addressed or else huge income tax bills come due. Careful planning can delay these income taxes saving the family huge amounts of money.
Peter Gutekunst who is a financial planner with whom I have worked in the past wrote the following article. Peter is also a close friend. He has focused a large portion of his practice no assisting people with the complexities of their Qualified Plans. Peter is a Marine and a proud veteran of the Dessert Storm/Dessert Shield and I have no qualms sending clients to him for advice.
Please enjoy this article that he has written and feel free to contact Peter or myself with any questions.
Peter L. Klenk, Esq.
Law Offices of Peter L. Klenk
Peter J. Gutekunst, CFP™
Financial Planner
Raymond James Financial Services, Inc.
Sometimes change comes in a package you least expect it. At least in this case, buried among all the details of an act of Congress that would seem to apply to corporations and the archaic pension plans they offer.
In fact, The Pension Protection Act of 2006 enhances numerous benefits for individuals who are planning for or already retired, designing a family estate plan, and considering options for funding a child’s or grandchild’s college education. The Act does completely replace the current defined benefit plan (traditional pension plan) funding rules. It’s hoped employee pension benefits will be better protected in the event of employer bankruptcies, however, many tax-payers will value the other provisions included in the legislation now signed into law by President Bush.
A common but often lost estate planning and income tax deferral benefit is the desire to “stretch out” the income stream from a 401(k) or other employer sponsored retirement plan to non-spouse beneficiaries. After a parent died, non-spouse beneficiaries would ask for assistance in transferring mom’s or dad’s 401(k) into an inherited IRA. Unfortunately the question was raised too late. Most 401(k) plans cut lump-sum taxable checks to non-spouse beneficiaries accelerating all the income taxes into one year. In many cases, the size of the check would cause the beneficiary to be taxed at the highest federal income tax bracket.
Although the previous law permitted a plan to distribute funds over a beneficiary’s life time, companies didn’t want to be tracking account balances for their former employees’ children and grandchildren over the next 20, 30 maybe 50 years. In addition, funds couldn’t be rolled into an IRA as that option was only available to spouses.
The new law specifically permits corporate retirement plans to transfer trustee to trustee retirement plan assets to an “inherited” or “beneficiary” IRA beginning in 2007. This would not be a taxable event. Once funded, the beneficiary would then be permitted to take life time distributions from the new “beneficiary IRA” under the IRA required minimum distribution rules for inherited IRAs.
Despite the new law, it’s possible that a plan administrator will not be familiar with or have automated processes in place to complete the transfer properly. It’s important to understand the process involved and the correct steps needed to implement correctly.
The new law prevents what in the past could have been a costly mistake but, many reasons still exist to consider an IRA rollover during your lifetime. It’s always a good idea to consult with your estate planner and financial consultant to determine whether or not you should leave assets in your employer sponsored retirement plans.
Other provisions of significance in The Pension Protection Act of 2006 include the permanency of many “temporary” tax laws implemented over the past several years. The laws scheduled to “sunset” or expire in 2010 that are now permanent include, ROTH IRAs, tax-free qualified distributions from Section 529 educational plans, and the increased IRA contribution limits.
Charitable provisions included in the Act permit taxpayers age 70 and-a-half to make charitable contributions of up to $100,000 in 2006 and 2007 directly from an IRA to a qualified charity. These distributions will be tax-free, will not be added to adjusted gross income (AGI), and satisfy the required minimum distribution requirements.
For many Americans, their IRA or employer sponsored retirement account is the single largest asset in their estate. When properly integrated into your retirement and estate plan, it can be a powerful resource in helping you reach your income and legacy goals.
Peter J. Gutekunst, CFP™ manages the independent firm Gute Financial, LLC in Spring House at 1012 N. Bethlehem Pike offering securities exclusively through Raymond James Financial Services, Inc. member NASD/SIPC. Peter, a Raymond James Financial Planner, can be reached for consultations at 215-643-1515 and Peter.Gutekunst@RaymondJames.com or visit www.RaymondJames.com/GuteFinancial You should discuss any tax or legal matters with the appropriate professional.
