The day eventually arrives when you decide to begin receiving distributions from your individual retirement account. If you have reached age 70=, you will be required to begin distributions. In either case, what do you do? The bank, broker or mutual fund with which you invested your IRA money was probably highly skilled in investing the assets and making them grow, but deciding how to receive benefits and who should be your beneficiary is often outside of their area of expertise. They will probably have form documents for you to sign, and may offer some explanations, but this might not be adequate. Here's why:
A decision about your IRA distributions will only make sense if you consider a number of factors:
- What are your income needs in retirement?
- What other assets do you have to cover those needs?
- What resources does your spouse have available?
- What health problems and family history may affect you and your spouse?
- What is the family, income and health situation of your children?
- What measure of control do you want to exercise over distributions from the IRA if you're not around?
Recalculation: What Is It?
Once you reach age 70=, the distribution of benefits must take place over your life or life expectancy, or the joint lives or life expectancies of you and your spouse or other beneficiary. Recalculation is the process of revising the rate of distribution of benefits, based on having lived another year. Recalculation can be done on an annual basis. This means that distributions may differ each year, depending on whether you have elected to recalculate your life expectancy each year, or your spouse's life expectancy, or both. These choices will determine how much is paid out each year, and whether any assets can remain in the IRA for the benefit of your family. You can't make an intelligent decision about distribution from the IRA without knowing the financial effect of recalculation. If you don't make a choice, a choice will be made for you by default under the provisions of the law, and this could result in serious adverse financial consequences to you.
The answers to questions 1-6 above will give your advisors guidance on how to plan withdrawals. Many people have IRAs at multiple locations. Those IRAs need to be considered together in planning for distributions. The planning process is very similar to planning your estate. You wouldn't sign a form Will that had been designed for a thousand other people. You want a document that takes into account your special circumstances. The same is true of planning for IRA distributions.
What's the Solution?
You need to consult with an advisor who is familiar with tax, estate planning, and employee benefits law, to be able to decide on the appropriate distribution planning technique. He or she can discuss with you how your benefits should be distributed, who should be your primary and contingent beneficiaries, whether the use of a trust as beneficiary makes sense for you, and whether you or your spouse should elect to recalculate. Then, you can execute the appropriate beneficiary designations and other documents, and receive the maximum benefit for yourself and your family from the IRA assets you have accumulated.
This process should be part of your overall estate planning, the careful planning of how all of your assets will pass to your spouse and future generations.
What Difference Does It Make?
Potentially, distribution planning may mean a large amount of money will not be lost to you and your family. Because you are planning for the distribution of assets over a long period of time, the decisions about how and to whom distributions are made can result in dramatically different transfers of wealth. If distributions can be deferred, in part, to the next or succeeding generations, family members may enjoy the benefit of hundreds of thousands or even millions of dollars more than if other choices are made. No one set of decisions makes sense for everyone, and the right decisions can only be made after a careful review of your situation, and a comparison of the tax consequences of various options. For example, one family recently found through distribution planning that they would receive, over a period of years, distributions of $18,000,000, rather than the $7,000,000 they had previously thought would be paid to them. Not every plan is this dramatic, but every situation needs expert planning.
This Update was prepared by Bob Louis, a member of Saul Ewing's Employee Benefits Group. If you have any questions or would like additional information, please contact Mr. Louis at (2150 972-7155, fax at (215) 972-1826 , or e-mail at rlouis@saul.com.