Wednesday, July 20, 2011

Choosing a retirement account

I don't often advise my clients on choosing a retirement account to fund. Your financial planner is usually in a better position to advise. Instead I focus on the impact to your estate planning after the fact. Of course, this knowledge will help inform you as to which is your best option, but ultimately I will leave that decision to you and your financial planner.

The above notwithstanding, I can't help but point out this IRA matrix found on Wikipedia. Generally, Wikipedia is a great source for objective (and generally correct) information. I believe this to be no exception. Apply your unique circumstances against this table to help guide you to the right account.

One thing I'd like to point out is about seven rows from the top of the table in the "Forced Distributions" row. Notice that Roth IRAs do not require forced distributions. For estate planning, this can be extremely valuable. While generally the guidelines are drawn up so that your retirement account is used up before you die based on actuarial tables and effected through Required Minimum Distributions ("RMDs"), Roth IRAs do not require distributions during the contributor's life. This allows a Roth IRA owner to pass on her account to her children who can withdraw tax-free (Roth IRAs are built on after-tax contributions). Naming an IRA trust as a beneficiary where the oldest beneficiary is relatively young, can allow the account to grow substantially. Since the the distribution rate is based on the life expectancy of the eldest trust beneficiary, the minimum payouts can be minimal depending on the beneficiary's age.

Over time, as payouts are made to the trust, the funds may be reinvested and held based on the discretion of the trustee and distributed for certain life events and/or at different ages. A good article ran in Forbes a while back extolling the virtues of such an arrangement.

Of course such a strategy should be examined on a case by case basis, but it's just one more factor to consider when creating and funding that all-important retirement account.

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