I. QUESTION PRESENTED
Should Mr. Dutton designate his spouse or the Paul Dutton 2013 Trust as the designated beneficiary of his retirement plan?
II. SHORT ANSWER
Mr. Dutton should designate his spouse as the sole beneficiary of his retirement plan because this will provide the maximum amount of income tax deferral and flexibility in distribution but lead to no additional restrictions on the use of the funds. This will also avoid the high income tax rate imposed on trust.
III. STATEMENT OF FACTS
Paul Dutton currently holds a 401(k) retirement plan provided by this employer, Acme Auto Parts, Inc. The value of the plan is currently $2,400,000 and all contributions to the plan have been made with pre-tax income. He has currently designated Erika …show more content…
The general rule is that the distributions must begin by April 1st of the calendar year after which the owner reaches 70 ½ years of age. An exception is made for employer plans, which will require distributions to begin by April 1st of the calendar year following the calendar year in which they retire. Treas. Reg. § 1.401(a)(9)-2, A-1, A-2(a); See also I.R.C. § 401(a)(9)(C). If the employee owns more than five percent owner of the company, the general rule above will apply instead of the exception for employer plans. I.R.C. § 401(a)(9)(C)(ii); Treas. Reg. § 1.401(a)(9)-2, A-2(b). For subsequent years, including the second calendar year, the distributions must be made before the end of that calendar year (i.e. December 31st). Treas. Reg. § 1.401(a)(9)-5, A-1(c). If the owner dies before the date upon which distributions must begin, there will be no required distribution for the death year. Treas. Reg. § 1.401(a)(9)-2, …show more content…
These two elements will determine when the distributions to the beneficiary must begin and when the total balance of the account must be distributed. Since you are contemplating designating either your spouse or a trust as the beneficiary of your retirement account, I will fully analyze both of these situations below and provide a recommendation of which will be more advantageous for your specific
Should Mr. Dutton designate his spouse or the Paul Dutton 2013 Trust as the designated beneficiary of his retirement plan?
II. SHORT ANSWER
Mr. Dutton should designate his spouse as the sole beneficiary of his retirement plan because this will provide the maximum amount of income tax deferral and flexibility in distribution but lead to no additional restrictions on the use of the funds. This will also avoid the high income tax rate imposed on trust.
III. STATEMENT OF FACTS
Paul Dutton currently holds a 401(k) retirement plan provided by this employer, Acme Auto Parts, Inc. The value of the plan is currently $2,400,000 and all contributions to the plan have been made with pre-tax income. He has currently designated Erika …show more content…
The general rule is that the distributions must begin by April 1st of the calendar year after which the owner reaches 70 ½ years of age. An exception is made for employer plans, which will require distributions to begin by April 1st of the calendar year following the calendar year in which they retire. Treas. Reg. § 1.401(a)(9)-2, A-1, A-2(a); See also I.R.C. § 401(a)(9)(C). If the employee owns more than five percent owner of the company, the general rule above will apply instead of the exception for employer plans. I.R.C. § 401(a)(9)(C)(ii); Treas. Reg. § 1.401(a)(9)-2, A-2(b). For subsequent years, including the second calendar year, the distributions must be made before the end of that calendar year (i.e. December 31st). Treas. Reg. § 1.401(a)(9)-5, A-1(c). If the owner dies before the date upon which distributions must begin, there will be no required distribution for the death year. Treas. Reg. § 1.401(a)(9)-2, …show more content…
These two elements will determine when the distributions to the beneficiary must begin and when the total balance of the account must be distributed. Since you are contemplating designating either your spouse or a trust as the beneficiary of your retirement account, I will fully analyze both of these situations below and provide a recommendation of which will be more advantageous for your specific