Two books you can't do without.
Tax-advantaged retirement accounts are often one of the largest, if not the single largest assets held by the typical financial planning client. According to the Employee Benefit Research Institute (EBRI), at the end of 2001 (the most recent statistics available), Americans held about $10.7 trillion in such accounts. Of the total, almost $ 2.4 trillion, or 22.4%, was held in IRA and Keogh plans. Another $ 2.1 trillion, or 20%, was held in defined contribution plans. Until recently, much retirement planning advice was focused on how to accumulate wealth for retirement, but that focus is rapidly changing. With baby boomers approaching retirement age, demand for retirement saving advice will moderate while demand for retirement distribution advice is likely to explode.
Recently released books from two of the most respected names in the field of distribution planning, Ed Slott and Natalie Choate, should help advisors and their clients.
The Retirement Savings Time Bomb...and How to Defuse It By Ed Slott. Few individuals can make a complex subject like retirement distribution planning comprehensible, let alone entertaining, but anyone who has had the pleasure of listening to a live presentation by Ed Slott knows that he has that rare gift. Slott makes liberal use of humor, golf and baseball analogies and cases on which he has consulted to illustrate the human side of planning. For example, Slott illustrates the consequences of a rollover gone bad with a real live case in a section entitled "Worst Rollover Ever Attempted." He uses the concept of a baseball team roster to explain the pool of candidates from which a designated beneficiary can be drawn after an account holder's death. A little unconventional, yes, but highly effective.
The book starts out by emphasizing the importance of retirement distribution planning to readers: "What good is making an even 50 percent return on an investment if, at the time of withdrawal, taxes will step in to claim 70, 80, or maybe even 90 percent of it?" Slott asks.
He then lays the foundation for an explanation of the five-step plan he believes will be effective for the majority of readers. First, he jumps into a layman's explanation of the terms necessary to understand the laws governing retirement distribution planning, including the difference between adjusted gross income (AGI) vs. taxable income, basis vs. cost, beneficiary vs. designated beneficiary, conversion vs. recharacterization, life expectancy for tax purposes vs. actual life expectancy, and the like. From there he moves on to a discussion of risk, providing readers with a well-thought-out, 20-question retirement distribution risk questionnaire. The first part of the book concludes with a framework to help employees decide what to do with their employer-sponsored retirement plan when they separate from service or retire. They can roll over to an IRA, stay put, or withdraw; Slott discusses the pros and cons of each approach, including special tax treatments that may be available under certain options.
Part 2, which constitutes the bulk of the book, lays out a simple, five-step process that clients and their advisors can follow to protect retirement assets. The five steps are time it smartly, insure it, stretch it, Roth it, and avoid the death penalty trap. Timing may not sound particularly important, but as Slott points out in one example, failure to take required minimum distributions in a timely fashion can lead to a 50% tax on the amount that was supposed to be withdrawn (but wasn't). In the past, this tax was virtually never enforced because the IRS did not have a way to monitor compliance, but this is about to change. In 2004, financial institutions will be required to file RMD reports with the IRS.
Slott argues life insurance is often an appropriate tool to protect IRA account balances for future generations, and he offers examples of how to use it. He then explains the concept of the stretch IRA, and provides advice on how to ensure one's IRA can enjoy the longest possible lifespan.
Slott defines the Roth IRA as "the best gift Congress has ever presented to the American taxpayer." Step four discusses the intricacies of Roth IRAs and instructs the reader how to take advantage of this "gift" from our government. Step five warns of the "death trap," the interplay between the income tax and the estate tax that can decimate an IRA upon the owner's death. It also provides solid guidance for dodging the trap.
All good financial planners know that even the best laid plans go awry from time to time, so Part 3 of the book, entitled "What to Do When S*** Happens," was included to deal with life's little surprises.
The Retirement Savings Time Bomb is an outstanding book. This well-written, humorous and informative volume is suitable for clients, financial planners, insurance agents and registered reps. It is not the most comprehensive book ever written on the subject of retirement distribution planning, but it contains more information than any client will ever be able to absorb, and it covers just about everything the typical financial advisor needs to know about distribution planning.
Life and Death Planning for Retirement Benefits, 5th Edition, 2003 Revised By Natalie C. Choate. While Ed Slott has done a tremendous job of translating the complex rules surrounding distribution planning into plain English, Life and Death Planning for Retirement Benefits retains its position as the number one reference guide for serious practitioners. Now in its fifth edition, this newly revised and updated version, from one of the most highly respected experts in the field, is the quintessential reference guide for distribution planning specialists.
The first nine chapters offer a comprehensive explanation of the laws regarding retirement distribution planning. The final two chapters offer practical planning considerations and case studies. Finally, the appendices contain tables, checklists, sample designated beneficiary forms covering numerous contingencies, sample trust provisions and a sample power of attorney form. IRS Code citations are provided within the text so that the practitioner can refer to the relevant sections of the tax code as necessary.