| Sargent & Lundy Savings Investment Plan |
| IRAS: PICKING THE RIGHT BENEFICIARY |
| The following excerpts are from an article in the July
1998 issue of "Retire With Money". The opinions of the author,
Denise M. Topolnicki, may or may not reflect those of the SIP Committee.
Thanks to the bull market, many people now have more money in their tax-deferred savings plans than they need for retirement. If you're among them and want to preserve those assets for your heirs, you need to select each plan's beneficiary carefully. If you pick the wrong one, the tax man will get his hands on your savings sooner rather than later, reducing the time during which your stash can compound tax deferred. You can switch beneficiaries at any time. But it behooves you to make your beneficiary selections before age 70-1/2, when you must begin making withdrawals from your tax-deferred accounts. IRAs give you the most leeway in naming beneficiaries. Employer- sponsored plans such as 401(k)s often limit your choices to people rather than trusts or charities. In addition, federal law requires that after your death your employer-sponsored retirement benefits be paid to your spouse unless he or she waives the right to them in writing to the plan's administrator. That said, here's what will occur if you name one of the following as beneficiary of your retirement hoard: Your spouse. When your spouse inherits your IRA, she can roll the account over tax-free into a new IRA. That way, she won't have to start mandatory withdrawals until she turns 70-1/2. Moreover, she can minimize required distributions by naming a new beneficiary, since the amount of the withdrawal will be based on the joint life expectancy of herself and her beneficiary. One caveat: The IRS will assume that a beneficiary is no more than 10 years younger than the account's owner fro the purpose of calculating joint life expectancy. For instance, if your spouse is 70 and she names an infant grandson as her beneficiary, the IRS presumes the boy is 60. A spouse beneficiary also has the option of leaving the account in your name. Doing so makes sense only if your spouse is younger than 59-1/2 and needs cash. Reason: She'll escape the 10% tax penalty on early withdrawals as the IRA beneficiary rather than its owner. Alternatively, she can leave some funds in your account and roll the balance over to her own IRA. This move is smart if your spouse is younger than 59-1/2 and needs some, but not all, of the money immediately. Your children or other individuals. If you're single, widowed or divorced, select a child, another relative or a friend whose life expectancy will help reduce your required IRA withdrawals. When you die, however, a non-spouse beneficiary can't roll over your holdings into his own IRA. Instead, after your death he must drain your account within five years or begin making minimum annual distributions within one year. If you die before beginning mandatory distributions, your beneficiary's minimum withdrawals are based on his own life expectancy. If you die after 70-1/2, your beneficiary may continue withdrawals based on your schedule. A trust. You may want to leave your plan's assets in trust for one or more people rather than to those individuals outright. Say you remarried after a divorce and have children from your first marriage. By naming a qualified terminable interest property trust - known as a QTIP - as the beneficiary of your IRA, you can ensure that your spouse will receive income from the trust for life. When your mate dies, the trust's principal passes to your chose heirs. To designate a trust as your beneficiary, you must set it up before you turn 70-1/2. Hire a lawyer to draft a trust document, and send a copy to your IRA's custodian. Your trust can be revocable during your lifetime, meaning you can change its beneficiaries or provisions. It must become irrevocable upon your death, however. A charity. You can name a charity as beneficiary of an IRA, but if you want only some of the money to go to the organization, split your IRA into two accounts. Name the charity as beneficiary of one account and your spouse as beneficiary of the other. If you simply name your spouse and, say, the Red Cross as co-beneficiaries of a single IRA, you must calculate your mandatory withdrawals based on your life expectancy alone, since a charity's life expectancy is zero. Your estate. "This is the worst choice you can make," says lawyer Steven Lockwood of Lockwood Pension Services in New York City - and be aware that your estate will become your beneficiary by default if your primary heirs die before you do and you've failed to designate an alternative beneficiary. If you make this mistake, after you die your executor will almost certainly empty your account as soon as possible to wrap up your estate. |
This page updated on 6/8/98