1. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 What is it? Retirement plans help an individual defer tax, but not avoid tax Large qualified plan or IRA balances can mean potentially large –income tax payments –estate taxes Complex, technical rules govern distribution of assets from qualified plans and IRAs

2. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company2 What is it? (cont) Careful planning is necessary to –minimize tax payments –insure compliance with laws governing asset distribution The courts have generally not given planners the benefit of the doubt

3. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company3 When is it indicated? –Substantial retirement assets at retirement or at death –Desire to stretch out distributions and defer income taxation –There is a surviving spouse

4. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company4 Advantages –Various advantages to either a rollover or keeping assets where they are –Planning can reduce estate tax –Planning can stretch out distributions and defer income taxation

5. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company5 Disadvantages –Various disadvantages to either a rollover or keeping assets where they are –Failure to name a beneficiary or to plan can lead to increased taxation

6. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company6 Tax Implications –Subject to estate tax –Marital deduction –Distributions required at age 70½ (or retirement, for qualified plans) Roth IRAs (distributions not required until death)

7. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company7 Tax Implications (cont) –Distributions generally fully subject to income tax (except to extent of nondeductible contributions) Qualified distributions from Roth IRA not subject to income tax –Offsetting income tax deduction for estate tax attributable to IRA or qualified plan

8. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company8 An Issue at Retirement: Rollover vs. Keeping It In the Plan Advantages of a rollover –if plan participant is a controlling owner, a rollover may allow termination of the qualified plan; plan contributions and administration can cease –IRA may offer more investment flexibility –QJSA requires spouse consent for initial rollover, but not for subsequent changes in IRA beneficiary

9. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company9 An Issue at Retirement: Rollover vs. Keeping It In the Plan (cont) Advantages of keeping it in a qualified plan –plan loans may be available up to $50,000 limit –plan can invest in life insurance –some participants may be able to use 10 year averaging on lump sum distributions

10. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company10 An Issue at Retirement: Rollover vs. Keeping It In the Plan (cont) Advantages of keeping it in a qualified plan (cont) –ERISA’s anti-alienation rule gives qualified plans better protection against creditors –PBGC insurance may offer plan protection to defined benefit participants –qualified plan offers greater security for nonparticipant spouse

11. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company11 An Issue at Retirement: Converting to a Roth IRA Consider basic aspects of Roth IRA –conversion not permitted if modified AGI exceeds $100,000 (this limit does not apply after 2009) –no conversion if account holder married filing separately (this limit does not apply after 2009) –no limit on conversion amount; can be part or all of existing IRA –amount converted is included in gross income of IRA account holder for federal income tax purposes –distributions of principal and income from Roth IRA income tax free if certain conditions are met –no minimum distribution rules apply to Roth IRAs except after death

12. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company12 An Issue at Retirement: Economics of the Conversion Roth IRA conversion is a wash IF –taxes had to be paid out of the IRA –only the net amount would be invested in the Roth –income tax rates not expected to change

13. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company13 An Issue at Retirement: Economics of the Conversion (cont) Minimum distribution requirements makes traditional IRAs less attractive to older clients. Distributions and tax on Roth IRA growth can be deferred until after death Roth earnings not subject to income tax; may be beneficial IF owner can pay tax with other funds and roll full IRA amount to Roth

14. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company14 An Issue at Retirement: Why Consider Roth IRA Conversion? basic economics of conversion can be attractive conversion reduces taxes at death conversion provides a better source for unified credit applicable exclusion amount than a traditional IRA or qualified plan; Roth IRA is not IRD

15. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company15 An Issue at Retirement: Negatives of a Roth IRA Conversion to get full benefit of conversion to a Roth IRA, client must pay taxes from non-IRA funds in the year of conversion future tax law changes cannot be predicted; these changes may or may not favor investment in a Roth IRA instead of a traditional IRA

16. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company16 An Issue at Retirement: Nonparticipant Spouse’s Rights rights on state level may vary –community property states vs. common law states nonparticipant spouse rights at federal level given under Retirement Equity Act of 1984 (REA)

17. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company17 An Issue at Retirement: Nonparticipant Spouse’s Rights (cont) Major considerations under REA plans subject to “qualified joint and survivor annuity” (QJSA) must have consent of nonparticipant spouse –for any change in beneficiary that reduces spousal benefits –for rollover to IRA

18. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company18 An Issue at Retirement: Nonparticipant Spouse’s Rights (cont) Major considerations under REA (cont’d) Stock bonus, profit sharing plan, or ESOP need not meet QJSA requirement if participant’s non- forfeitable account balance payable as death benefit to spouse; spousal consent: –needed to change death benefit beneficiary –NOT needed for lump sum distribution

19. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company19 An Issue at Retirement: Using a “Frozen Plan” A frozen plan is one that has been amended to terminate future employer contributions and new plan entrants, but continues to exist for the benefit of existing participants –may not be feasible for business-owner retiree –administrative costs for maintenance can be high

20. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company20 Planning Retirement Distributions Lump sum or periodic payments –lump sum of entire amount with immediate taxation almost never recommended –periodic payments reduce tax burden

21. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company21 Planning Retirement Distributions (cont) Tax deferral as the basic goal –potential tax deferral can extend over 3 lives –vital to understand minimum distribution rules under IRC Sec. 401(a)(9) after-death distribution rules for death before and after required beginning date (RBD) for minimum distributions

22. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company22 After-death Minimum Distributions: Special Rules for 2009 Required minimum distribution for 2009 is waived. Five year rule is extended to six years if one of the five years is 2009.

23. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company23 After-death Minimum Distributions: Beneficiary is Participant’s Spouse Surviving Spouse Makes Spousal Rollover to IRA –minimum distributions for surviving spouse can begin April 1 of year following the year the surviving spouse attains 70½ –surviving spouse’s minimum distribution option is as if surviving spouse were the participant –surviving spouse can name new beneficiary

24. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company24 After-death Minimum Distributions: Beneficiary is Participant’s Spouse (cont) No Rollover to IRA –distributions must begin by December 31 of the year following the participant's death -if deceased participant had not reached age 70½, distributions can be deferred to December 31 of the year the deceased participant would have been 70½

25. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company25 After-death Minimum Distributions: Beneficiary is Participant’s Spouse (cont) No Rollover to IRA (cont) –if surviving spouse lives until date participant was or would have been 70½, minimum distributions determined over surviving spouse life expectancy, recalculated annually –at death of surviving spouse, distribution period reverts to fixed period based on spouse life expectancy –special rules apply if surviving spouse dies before participant would have been 70½ spouse treated as if he or she is participant, however, if spouse remarries and then dies, no spousal rollover treatment for his or her surviving spouse

26. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company26 After-death Minimum Distributions: Nonspouse Individual Beneficiary minimum distributions –must begin by end of year following death –are made over fixed period (based on life expectancy of beneficiary in year after death), even if named beneficiary dies and leaves proceeds to another if distributions do not begin at end of year following death, distributions follow the 5-year rule

27. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company27 After-death Minimum Distributions: No Individual Beneficiary Death before RBD Entire balance must be distributed by December 31 of fifth year following participant’s death. Death on or after RBD Distribution period is participant’s life expectancy in year of death, reduced by 1 for each subsequent year.

28. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company28 Beneficiary Designation Designated beneficiary must be individual (not charity or estate), for minimum distributions to be based on an individual life expectancy For multiple designated beneficiaries: life expectancy of oldest used to determine required distributions. Separate accounts may result in ability to use own life expectancies.

29. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company29 Trust as a Designated Beneficiary When certain requirements met, beneficiary’s life expectancy can be used to determine minimum distributions If multiple beneficiaries, age of oldest used to determine minimum distribution

30. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company30 Trust as a Designated Beneficiary (cont) Requirements for beneficiary of trust to be treated as designated beneficiary under minimum distribution rules –beneficiaries of trust must be identifiable from trust instrument –trust must be valid trust under state law –trust must be irrevocable or become irrevocable upon death –documentation of trust provisions provided to plan administrator

31. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company31 Estate Planning for Qualified Plan and IRA Accumulations Outright gift to spouse –eliminates federal estate tax at participant’s death through marital deduction –some income tax deferral can be preserved during surviving spouse’s life

32. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company32 Estate Planning for Qualified Plan and IRA Accumulations (cont) Leaving as QTIP –QTIP can be used if outright gift to spouse is unsuitable –rules governing use of QTIP as beneficiary are complex

33. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company33 Estate Planning for Qualified Plan and IRA Accumulations (cont) Bypass Trust Qualified plan or IRA benefits should be paid to bypass trust only if no other assets to fund trust –must pay income taxes on qualified plan benefits –reserve unified credit for appreciating assets –with trust, spouse loses way to extend income tax deferral on IRA benefits

34. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company34 Summary Goal: maximize income tax deferral Can “stretch” the IRA if spouse –named as beneficiary –survives participant –rolls over participant’s account into own IRA –names younger child or other heir as beneficiary

35. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company35 Summary (cont) Difficulties with this means of further tax deferral –spouse must survive participant –payment of estate taxes may deplete potentially tax- deferrable qualified plan funds

36. Estate and Retirement Planning With Qualified Plans and IRAs Chapter 9 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company36 Summary (cont) Possible remedies: –using “game theory,” determine probable date of death for participant and spouse and design plan to maximize taxes for the “most likely” event –use part of plan balance during life of participant and spouse to purchase life insurance to replace assets lost to federal estate taxation