5 Expensive Retirement Plan Mistakes to Avoid
Mistake No. 1: Naming Your Living Trust as the Beneficiary
want the minor beneficiary to have access to the funds until they are much older and more mature.
One of the primary goals of a retirement account is to defer the income tax ramifications as long as possible. In most cases, the beneficiary(s) is allowed to withdraw the funds over 10 years. In some less common situations, depending on who the named beneficiary is, the distribution could be as long as the life expectancy of the beneficiary. However, if a living trust is named as the beneficiary, the distribution must be completed in no more than 5 years. This accelerates the income tax burden for the beneficiary.
Mistake No. 3: Naming an Irresponsible Person as a Beneficiary
I am constantly amazed when I review documents drafted by other attorneys who have placed very detailed restrictions on a particular beneficiary’s funds in the trust but ignored the fact that the retirement account, with a substantial amount of money, lists the child as a beneficiary with no restrictions whatsoever. Mistake No. 4: Not Naming a Contingent Beneficiary in the Event the Primary Beneficiary Doesn’t Survive This is quite common with married couples. They name each other as the primary beneficiary of their retirement account, apparently not realizing that the death of a spouse will leave the surviving spouse without a beneficiary. Upon the death of the surviving spouse, this will trigger a probate on the account and shortens the length of the withdrawal period from 10 years to 5 years.
Mistake No. 5: Transferring the Retirement Accounts Into the Trust
This creates all sorts of problems. Transferring your retirement accounts into the name of your trust is considered a withdrawal of the assets in the account. This may trigger early withdrawal penalties depending on the age of the owner of the account. In addition, this will also trigger unnecessary premature income tax consequences. Furthermore, this shortens the withdrawal period from 10 years to 5 years. Please take the time to review the Retirement Accounts section in your Funding Instructions located in your maroon three-ring binder. If you still have questions after reviewing those instructions, please feel free to contact our Funding Department for further clarification and assistance.
Mistake No. 2: Naming a Minor as a Beneficiary, Such as a Child or Grandchild
The beneficiary of a retirement account must decide how quickly they will be receiving the funds. For example, they could wait until the 10th year and withdraw the funds then. Or they could withdraw the funds in equal increments over the 10 years. The problem is that a minor doesn’t have the legal authority to make these decisions. In addition, even if the minor could make these decisions, when the funds are distributed to the minor, they cannot cash the checks. Furthermore, most clients don’t
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