Qualified Deferred Retirement Plans
If you are the current owner of an IRA or 401(k), and are planning to pass this retirement savings to your children, there may be cause for concern. Washington is debating changing the rules that apply to IRAs and 401(k)s, which could affect your planning ambitions.
The general rule for distributions under an IRA or 401(k) requires that the assets be distributed within 5 years after the plan participant’s death. Under the current rules governing IRAs and 401(k)s, a plan participant can make a beneficiary of the IRA or 401(k) a “designated beneficiary.” A “designated beneficiary” receives the benefit of being able to receive distributions over his or her lifetime, which stretches out the distributions and defers taxes owed.
Additionally, there are strict IRS rules that allow a participant to make the beneficiary a trust if the trust conforms to the IRS guidelines. These trusts are known as “see-through” or “stretch” trusts.
However, these tax deferment and estate planning strategies are now an endangered species. Last year, Senator Max Baucus put together a proposal that would require that the inherited accounts would have to be liquidated within five years of the plan participant’s death. President Obama, in his most recent budget, made proposals that would close certain loopholes and limit the ability to “stretch” the retirement assets that will pass to beneficiaries. This past summer, when 51 percent of Democrats voted to extend low interest rates on student loans, they also voted to remove the ability to stretch IRA’s. Finally, the latest proposal by the American Bar Association, in a bi-partisan proposal, included recommendations on closing loopholes to stretch IRAs and 401(k)s.
Given the growing public discussion and calls for reform of the rules governing tax-deferred retirement plans, the ability to stretch these plans may be coming to an end. If you are the owner of such a plan with the intention of passing it to your children, it may be time address the situation. Please contact Browning, & Meyer Co., LPA to discuss setting up a qualified asset protection trust, otherwise known as a qualified “stretch” trust, to protect your planning strategy. The trust will be grandfathered in so as to protect your “designated beneficiary,” and allow tax to be deferred, while increasing the value assets held by your IRA or 401(k).