Retirement Planning

Some of the most generous provisions of the tax code are those that permit beneficiaries of IRAs and other qualified retirement plans to defer income tax on the plans until time of withdrawal. This allows the IRA or qualified plan to grow significantly more than if it were subject to tax on gains each year.

The tax code also permits beneficiaries to withdraw only a minimum amount from IRAs or qualified plans each year. By taking only these “required minimum distributions” a beneficiary can stretch out distributions over the better part of his or her lifetime, resulting in further deferral of income tax on the amount remaining in the plan.

Unfortunately, most beneficiaries fail to take advantage of this latter provision and withdraw all of the IRA or qualified plan funds immediately, thereby losing the significant tax advantages of tax-deferred growth. A common misperception is that one should not name a trust as beneficiary because it’s overly complicated and doesn’t permit a stretch out. While naming a trust does add a thin layer of complexity, a properly drafted trust not only permits the stretch out but it is the only approach that ensures maximum income tax deferral, if that is your objective.

There is no “one size fits all” answer here. Rather, this is best decided after consultation with professionals who understand these issues. The retirement planning attorneys at Bartlett & Herrington have experience counseling individuals on the best way to plan for retirement assets. Contact us today for a consultation.

Schedule Your Retirement Planning Session