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QUALIFIED PLAN DISTRIBUTIONS
About to retire? Facing corporate downsizing? Been too successful
in saving for retirement and now face a 15% excise tax? Nearing
age 70-1/2 when mandatory distributions must begin and confused
about the options and alternatives available to you? -- These
are just a few of the personal financial issues people must
deal with today. Unfortunately, all too often we receive improper
and/or incorrect advice as to how to make the choices that
need to be made. And, if you don't make well-informed choices
regarding your financial future, you and your family may end
up losing significant amounts of money! The three case histories
that follow are designed to shed some light on some of the
most common situations that arise.
Case History 1: Early Retirement
A 52-year-old man is "forced" into early retirement.
He has $320,000 in pension assets and $160,000 in 401k assets.
He has little, if any, new job opportunities, and his spouse
works part-time earning $20,000 a year. This person needs
immediate income -- a minimum total of $50,000 a year. He
needs to avoid a 10% penalty on pre-59-1/2 distributions,
and he also needs to be able to change the distribution amount
or eliminate the distribution in the future.
By taking advantage of one of the "exceptions" to the pre-59-1/2
distribution rules ("substantially equal distributions"), over
a 5-year period or up to age 59-1/2 (whichever is later) this
"retiree" can receive nearly $35,000 from his pension plan and
401k assets without incurring the 10% penalty. Beginning at
age 59-1/2, he can modify the distribution in any way -- increasing,
decreasing, or even eliminating it at will.
Case History 2: Excise Tax on Excess Accumulations
or Distributions
A 62-year-old man has a 62-year old spousal beneficiary,
$1,600,000 in qualified plan assets, and $170,000 lifetime
excise tax exposure. Not only does he need a smooth flow of
income from his plan assets, but he also needs to minimize
or eliminate any excise tax, minimize income taxes, provide
maximum estate value, and mininize income taxes to his beneficiary.
Based on conservative assumptions and by waiting until age 70-1/2
to begin distributions, this person will certainly exceed the
threshold amounts and be subject to the 15% excise tax. By beginning
distributions today, as opposed to waiting, and by making the
proper calculations, we can identify the proper dollar amount
of distribution necessary to completely eliminate the excise
tax and have a smooth flow of imcome. Then, shortly before age
70-1/2 when mandatory distributions become necessary, we make
proper irrevocable elections to ensure the lowest possible income
tax exposure, the maximum estate value for the beneficiaries,
and a continued smooth flow of income. The key ingredient
in this situtation is to have the proper elections made at the
time that mandatory distributions begin.
Case History 3: Excise Tax on Excess Accumulations
or Distributions
A 69-year-old man has a 69-year old spousal beneficiary
and $315,000 in qualified plan assets. Both spouses are in
good health. This man has other money and does not need income
from his qualified plan assets. He does need to minimize income
taxes, maximize estate value for his beneficiaries, and reduce
taxes to his spouse upon his death.
By making the proper irrevocable elections from the menu of
available selections, this man can take the lowest dollar amount
of required distributions, thereby gaining the lowest income
tax exposure, the gratest estate value for his spouse and other
beneficiaries, and the lowest income tax exposure to the spouse
upon his death. He can accomplish all of this and still maintain
flexibility in the event he needs or wants more income. Remember,
he is only taking the minimum distribution amount, and he can
always take more. The irrevocable elections to be made in this
situation based on the data collected are (A) joint life expectancy,
(B) recalculate life expectancy of account owner, and (C) recalculate
life expectancy of the beneficiary.
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The Insurance and Planning Resource Center: QUALIFIED PLAN DISTRIBUTIONS
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