During this time of high estate tax exemption, most people can maximize the tax and other benefits of their retirement accounts without any estate tax consequences. See the six tips below to help you start getting the most from your retirement assets.
Tip #1: Keep rollovers from employer plans separate from other IRA funds for asset protection
Non-bankruptcy creditor protection is limited to one IRA in Michigan so leave retirement funds in the employer’s plan if possible. But, if you must roll over an account from an employer’s plan into an IRA, create a separate IRA for these rollover funds. Do not mingle funds from previous employer plans with funds currently being contributed directly into an IRA as this will cause you to lose the bankruptcy and creditor protection afforded to IRAs containing only employer plan benefits.
Tip #2: Name your spouse as the sole, primary beneficiary
If you are married, naming your spouse as the beneficiary for your retirement assets usually provides the best tax result. This allows your spouse to roll your account into his own IRA (instead of into an inherited IRA), use a more favorable required minimum distribution (RMD) calculation, and defer RMDs until the surviving spouse reaches age 70 ½.
In some cases delaying the rollover into the surviving spouse's IRA may be preferable because:
The IRA can then be rolled into the surviving spouse’s IRA at any time.
Non-tax factors may favor naming a non-spouse beneficiary, such as children in a second marriage or a desired charitable gift after the first death.
Tip #3: Never name an estate or non-"see-through" trust as a beneficiary
"Designated beneficiaries" of an IRA can calculate RMDs based on the beneficiary's life expectancy, which is a desirable deferral of the income tax otherwise due on that account balance. Estates, charities, and trusts that don't meet certain requirements, however, can never be designated beneficiaries. Naming individuals directly as beneficiaries usually provides better income tax deferral than a trust does, but a carefully drafted trust (a "see-through" trust) may be a better option if you wish to provide benefits to a charity, minors, children from multiple marriages or people receiving government benefits.
Tip #4: Create separate accounts for multiple beneficiaries
If the account owner named multiple beneficiaries, a separate account should be created for each beneficiary, ideally by September 30 of the year after the owner's death. This would allow each beneficiary to calculate RMDs on his or her own life expectancy, rather than on the beneficiary with the shortest expectancy. If beneficiaries fail to establish separate accounts by December 31 of the year after the owner’s death, the RMDs will be based on the beneficiary with the shortest life expectancy.
Tip #5: Roll over an estate’s or trust’s account to the surviving spouse if he or she is the sole fiduciary and beneficiary
If your spouse named a trust or the estate as the beneficiary of his retirement account instead of you, you still may be able to roll over the account into your own IRA if you fully control the trust or estate as the sole fiduciary and you are the sole beneficiary. While some account custodians will treat a spouse in this situation as the account’s beneficiary, this rollover may require an opinion letter from an attorney or a private letter ruling from the IRS.
Tip #6: Defer or stretch the payout of a Roth account after death
A non-spouse beneficiary of your Roth IRA must take RMDs after your death.
If you haven’t checked your IRA beneficiaries or your estate plan lately, now is a good time to verify the beneficiaries of your retirement assets and how they fit with your larger estate plan. Your attorney can help you fix issues with beneficiaries or trusts to avoid problems later and allow your beneficiaries to maximize the tax benefits from your retirement assets.
