Life and Death Planning for Retirement Benefits

Chapter 2: Income Tax Issues

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exemption in federal bankruptcy proceedings, protection varies wildly for inherited plans and also (for everyone) outside of bankruptcy, depending on state law (for IRA exemptions) and ERISA (which protects some but not all employer plans). Using rollovers to “beat the system.” See ¶ 2.6.05 regarding use of an IRA-to-QRP rollover (or a Roth conversion and recharacterization) to evade the once-in-12-months rule

applicable to IRA-to-IRA rollovers. 2.7.03 Best how-to rollover tips

Use a 60-day rollover ( ¶ 2.6.01 (D)) when it is needed—for example, to isolate after-tax money outside a QRP (see ¶ 2.2.05 (C)) or when taking advantage of the NUA deal combined with a partial rollover ( ¶ 2.5.07 ). Otherwise, in order to: minimize the risk of mistakes and “lost” rollovers; avoid mandatory income tax withholding ( ¶ 2.3.02 (C)); and avoid concerns with certain rollover rules; always use a direct rollover ( ¶ 2.6.01 (C)) or IRA-to-IRA transfer ( ¶ 2.6.08 ) instead of a 60-day rollover. Ed Slott tip: Do your rollover or transfer no later than November, so mistakes will be revealed in the December account statement and can be caught and fixed before year-end. Roll or transfer securities, rather than selling the securities, transferring cash, and repurchasing the securities, to save commissions. No matter how you accomplish your rollover or transfer, have the phone number of your account representative handy, then go on-line and watch the transactions like a hawk to catch, prevent, and/or fix mistakes. Elect out of income tax withholding on rollovers and transfers if the IRA provider offers you the election. ¶ 2.3 . 2.7.04 How many IRAs should a person own? The more retirement plan accounts and/or IRAs a person owns, the greater the chance for making a mistake (accidental distribution, missed RMD, lost beneficiary designation form, etc.). Estate planning for multiple accounts is more expensive because the attorney must draft and coordinate multiple beneficiary designation forms. If the plans have different beneficiaries, the estate plan gets out of whack when the participant (or his legal guardian, or power of attorney- holder) takes distributions disproportionately. Therefore, ideally, all things being equal, the client should consolidate his retirement plans unless there is a good reason to keep separate plans, such as: If one of the client’s IRA investments involves a prohibited transaction risk, keep that asset in its own separate IRA, so if there is an IRA-disqualifying PT it will destroy only that one separate IRA, not all of the client’s IRAs. See ¶ 8.1.06 . A client who is subject to taking RMDs, and who has a substantial IRA investment that becomes worthless after the end of the year but before the client has taken his RMD for the following year, will be grateful if the now-worthless investment was in a separate IRA as of the end of the prior year. See ¶ 1.2.05 . There can be some advantage to having separate IRAs payable to different beneficiaries, rather than having one big IRA payable to multiple beneficiaries, if the beneficiaries don’t get