Checking the Beneficiary Box, Part II
by Richard
Step one was making sure that your current designations on your workplace retirement savings accounts were in order.
Step two involves some more sophisticated estate planning…
…a task that takes on an entirely new dimension when you have heirs spanning one or two generations.
Start with the idea that there are two kinds of retirement accounts:
- Those that are funded by tax-deductible dollars (regular 401-k and regular IRA accounts)
- Those that are funded by after tax dollars (Roth 401k and Roth IRAs)
The rule on the regular accounts is that the tax will be paid upon distribution. What you control is whether the distribution will be a lump sum, or taken as required minimum distributions based on the actuarial tables furnished by the IRS.
The advantages in drawing down just the minimum required is that your tax obligation is broken down into bite-size chunks each year…and more importantly, the corpus of your account can and should continue to be invested.
Think of it as a bucket that has a hole in the bottom (withdrawals), but that continues to steadily fill up from the spigot of compounded earnings.
When your heir(s) inherit, they will then draw down based on their life expectancy.
For example, your spouse can simply rollover your unused portion into their own IRA, and draw the minimum required for their life expectancy.
The opportunity to plan for dynastic wealth emerges when you designate someone a generation or two younger…your children or grandchildren…as the beneficiary. Simply because they have a much longer anticipated life span, and will therefore be taking smaller distributions.
This is not absent all possible peril. If a sixteen year old grandson is designated as beneficiary, he could blow it all on fast cars and women.
Or he could spend it all foolishly.
Better to set up a trust as beneficiary, so that an adult can dole out the funds in a more responsible manner.
The possibilities are magnified dramatically when we deal with Roth accounts.
They will still require lifetime amortization (for the heirs, not for the initial account holders), but there will be no taxation.
Think this through. I set up Roth IRAs for both of my kids when they were earning money from summer jobs as teenagers. They could continue to fund these accounts for another sixty years—maybe longer, with no required distribution.
And then they could name their future grandchildren as beneficiaries, under trust supervision by the middle generation…to run an additional 75 years, with regular draws that are never, ever taxable.
A way to fund expensive education and other life essential goals, to benefit both your children and grandchildren.
An elegant but simple plan, that requires some foresight and much patience.
Resulting in what the lawyers like to call control from the grave.
