We started this series of articles two weeks ago by noting the five key traits of qualified defined contribution retirement plans, such as profit-sharing plans or 401k plans, and IRAs. We mentioned the need to consider these characteristics when planning for these assets, including dispositions upon the plan beneficiary’s death.
Last week we discussed five traits of 401(k) plans, profit sharing plans, and IRAs. We need to keep these traits in mind to maximize the economic benefits of these assets. These traits come to the forefront when we are doing estate planning. This week we discuss three of the five traits and their impact: (1) plan income grows tax free, (2) plan distributions carry an income tax liability, and (3) there are required plan distributions.
For many people, an interest in a retirement plan, such as a profit-sharing plan, 401(k) plan, or individual retirement account (IRA), is their most significant asset. Planning for these assets is a real challenge.
The complexity in this area is monumental. There are many different types of retirement plans. The retirement plan that we are focusing on is sometimes called a “qualified defined contribution plan” or, popularly, a profit sharing plan or 401(k) plan. An IRA is a similar type of plan for purposes of discussing distributions from the plan. Note, however, that a Roth IRA is subject to a different set of rules than what is set out below.
Many people will grow old and become disabled so that they can no longer care for themselves. People in this situation frequently rely on a spouse or child for care. However, some people won’t have a spouse or children. For other people, the spouse may have passed away or be too infirm to provide assistance. Children may not live nearby or may be unable to help.