RETIREMENT PLANS AND ESTATE PLANNING

Estate planning is not limited to positioning your assets in anticipation of your death. The size, nature and handling of your estate also depend on how you arrange your finances both preparing for, and during, your "golden years." Consequently, another important aspect of estate planning involves taking steps to maximize your income and enhance your financial security after your retirement.

Not surprisingly, the new tax law also makes significant changes to the rules affecting the assets you put aside for your retirement, or for your heirs if you die before "spending down" those savings. The rules governing these arrangements, both under the new law and its predecessors, are complex. Obstacles line the path of retirement planning in the form of restrictions on how much you can save; when you can take optional distributions; when you must take distributions, where you can put your contributions, and that is the short list. The good news is that the changes made by the new law are generally to your benefit.

Retirement Plan Tax Changes

You will be allowed to make larger contributions to, and take greater benefits from, qualified plans, such as those maintained by your employer. Contributions may take the form of deposits that your employer makes for you, or they may be deferrals that are taken out of your pay and held in an account, as in the case of 401(k) plans.

You also will be able to contribute more to your IRA, whether it is a traditional IRA or a Roth IRA. If you are 50 or older, you may be able to make "catchup-up" contributions to your IRA or your qualified IRA.

You will be able to reduce the distributions you must take from your qualified plans when you reach your required withdrawal date, and you and your heirs may stretch the payments out for a longer period of time.

You will have more flexibility in determining how and to whom your IRA or plan assets will be paid after your death, and in moving them among various types of accounts while you are alive. The options available to you in terms of where you can focus and what you can use for your retirement savings will expand, even permitting you to set up a Roth IRA in your 401(k) plan.

The changes made to the rules governing IRAs and employer-sponsored retirement plans are intended to encourage retirement savings. As a result, it will be possible to capitalize your retirement benefits so that in addition to making up a larger dollar portion of your estate than ever before, they can also be distributed in ways that will make funds available not only for your own needs but also to your heirs as part of your estate. The retirement plan provisions of the new act offer strategies and opportunities that can be an important part of your estate planning.

Sheltering Retirement Plan Assets

In order to ensure that your assets that have been put away on a tax-deferred basis will be used to support you in your retirement rather than simply provide an inheritance for your heirs, the law requires that you begin taking distributions from your retirement savings after you reach age 70-1/2. Two recent developments, proposed regulations issued by the IRS, and Congress' order to update the mortality tables used to calculate IRA payments, will reduce the size of the payments you are required to receive during your lifetime. This means you can plan on keeping more money in your estate to pass to your heirs.

More Variety in IRA Options

One of the important goals of estate planning is providing for comfortable retirements years. IRAs are a valuable tool in this endeavor, and they can be a valuable asset in your estate as well. The new law increases the current $2,000 maximum annual amount you can contribute to your IRA (depending on your level of income) starting in 2002, according to the following schedule:

Another change in the law enhances the "portability" of your retirement assets. You will be able to roll over amounts from IRA into another IRA or employer-offered retirement plan and your after-tax contributions from one employer plan to another or to an IRA. This permits you to preserve your retirement benefits if you switch jobs among employers, and it also allow you to design a more efficient "package" for your estate.

More Money in Retirement Plans

Under the new law, the contributions you make to your retirement plans, or that your employer makes on your behalf, may end up composing a larger portion of your estate. If you are at least 50 years old, you will be able to make "catch up" contributions to your IRA or 401(k) plan or $500 each year from 2002 through 2005 and $1,000 each year from 2006 and thereafter. The limit on the regular contributions you and your employer can make to your defined contribution plans (such as profit sharing and 401(k) plans) also will rise. The maximum amounts you will be able to contribute to your 401(k) plan, for example, will increase according to the following schedule:

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