Retirement Planning for Physicians after the Taxpayer Relief Act of 1997
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Physicians face a staggering array of options regarding their retirement plans. The new tax law significantly increases the ability of many retirement plan participants to accumulate wealth and reduce taxes. This article provides guidelines for physicians to optimize the benefits of their retirement plans.
Table of Contents
Always Make Contributions into a Matching Contributory Plan
If your medical center offers a retirement plan where your contributions are partially or fully matched, then you should contribute the maximum amount. Neither your nor your employers contribution will be currently taxed for federal income tax purposes. State and local taxation of retirement contributions vary. All taxes on the dividends, interest, capital gains, and appreciation of the invested funds will be deferred until you begin making withdrawals from the retirement plan.
Normally, participants will be provided a choice of investment vehicles. TIAA and CREF are the most popular for employees of nonprofit organizations, but other funds, including a family of Vanguard funds, are frequently offered. While choosing the type of investment is certainly important, it is not as important as the choice of whether or not to make tax-deferred contributions.
TIAA/CREF participants are given a choice of investment funds, including two with track records of more than 40 years. One dollar invested in TIAA at the beginning of 1953 would have grown to $15.03 by October 1997, thereby providing a 6.2 percent annual rate of return. One dollar similarly invested in CREFs stock fund would have grown to $130.97an 11.4 percent annual return.
Should You Make Non-Matching Contributions?
Many medical institutions allow you to make non-matching, tax-deductible contributions called Supplemental Retirement Annuities (SRA) to TIAA, CREF, or other investment vehicles. The SRA is conceptually similar to non-matched, fully deductible contributions made to IRAs, 401(k)s, SEPs, Keoghs, SIMPLE plans, 403(b)s, 401(a)s, and defined contribution plans. For simplicity, this article refers to all of these plans as SRAs. After you have contributed the maximum amount that is subject to full or partial matching by your employer, I highly recommend making the maximum allowable additional tax-deductible, non-matching contribution that you can afford. Please keep in mind, however, that age 59½ is usually the earliest that you will have access to your SRA funds unless you retire or terminate services.
Investing in SRAs is better for long-term wealth accumulation than investing in the after-tax environment. For example, if you are in the 28 percent tax bracket, then you must earn $1.39 before taxes to accumulate $1.00 after taxes. After that dollar is invested, you then must pay income taxes on the interest, dividends, and capital gains which are earned on that dollar. To accumulate $1.00 in the before-tax or SRA environment, however, you only have to earn $1.00. In addition, the earnings and accumulations in your account will not be taxed until they are withdrawn. A graphic comparison of the accumulations in a taxable versus a tax-deferred environment follows. (See Exhibit One.)
Many clients ask if it would be better for them to make SRA contributions or to pay off their mortgage at a faster rate. Under most circumstances, I think that making contributions to the SRA will be the preferred answer, if the goal is to attain the greatest accumulation of dollars in the future. There are two reasons for my recommendation. First, you have the opportunity to defer income taxes on the retirement plan contributions and on your earnings and accumulations. Second, the mortgage interest expense can be deducted on your tax return.
In my opinion, the financial goal for a majority of physicians in their working years should be to accumulate as much wealth as possible in the tax-deferred environment. One situation where it may be wise to make earlier than required distributions from a retirement plan, however, is when there will be significant estate taxes, and the retirement plan holds the only funds available to pay the estate taxes after the participants death. It may be wise to make earlier than required distributions, pay the income tax, and then give the after-tax proceeds to your beneficiaries. This strategy will, in limited circumstances, be beneficial by not only reducing the amount of the estate, but also by providing the beneficiaries with funds to pay the estate taxes. Another exception to the goal of accumulating money in the tax-deferred environment is to utilize funds for either a Roth IRA and/or a Roth IRA conversion which is discussed later in this article. Finally, methods of leveraging gifts with second-to-die life insurance policies, grantor retained annuity trusts, family limited partnerships, charitable remainder trusts, and other techniques may be appropriate for wealthy physicians.
Retirement OptionsShould You Annuitize?
Annuitizing your retirement plan accumulations means surrendering all or a portion of your accumulated retirement account in exchange for receiving regular payments for life. Married participants who annuitize often choose to receive payments for the remainder of their and their spouses lives. One problem with annuitizing is that your money is paid on a regular scheduleand this may not be in tune with your needs. If you do not need the money, then annuitizing needlessly accelerates the payment of income taxes on your retirement accumulations. Furthermore, if you need more than the annuity amount, then you are just plain out of luck. Finally, annuitizing TIAA/CREF funds will reduce the amount of funds available for a Roth IRA conversion.
Another problem with annuitizing is the methods ineffectiveness in terms of providing for your heirs. By annuitizing, the accumulation in your retirement plan will vanish upon your death unless you choose the surviving spouse or guaranteed period options. Choosing these options, however, will reduce the amount of money that you will receive in annuity payments.
In essence, annuitizing is a gamble. Since the annuity is based on ones life expectancy, you are gambling that you will outlive your actuarial life expectancy. Thus, if you have reason to believe that you may not survive your actuarial life expectancy, then annuitizing would probably be a mistake. If you and/or your spouse, however, think that you are going to substantially outlive your actuarial life expectancy, then annuitizing will provide an assured income stream for a long life. For individuals who are unsure of their life expectancy, I often recommend that they consider annuitizing only a portion of their retirement accumulation. Annuitizing a portion, but not all of your retirement accumulation, is a method of diversifying your retirement assets. Consider annuitizing sufficient funds that--in combination with social security and other income--will assure you and your spouse of at least enough funds to pay for essential living costs.
In most cases, however, annuitizing all or most of your retirement plan is not recommended. Our analysis indicates that retirement plan participants and their beneficiaries will receive significantly more money if the participant chooses not to annuitize. In addition, not annuitizing will allow significant income-tax deferral for the beneficiaries after the death of the participant. To learn more about the potential benefits of leaving retirement accounts to beneficiaries, please see my article "Spreading the Wealth," published in the September 1995 issue of Financial Planning.
In addition to annuitizing, CREF participants have several options regarding their retirement accumulations. First, you can withdraw all of your accumulations, which will trigger income taxes on the entire balance. This option would not be wise, but it is an option. Second, you can make a tax-free rollover to an IRA. If you meet other requirements, you could also convert your CREF into a Roth IRA, which will be offered by TIAA/CREF in early 1998. Third, you can have CREF systematically withdraw a specified amount from your account on a monthly, quarterly, semi-annual, or annual basis. The amount of your withdrawal can be changed at any time, and there is no limit to the number of withdrawals that you can request.
Fourth, if you are satisfied with CREF as an investment vehicle and do not want to make any withdrawals until they are required, then you should consider the Minimum Distribution Option (MDO) (provided that your employers retirement plan offers it). The MDO assures that CREF will make only the minimum distributions required by federal tax law. Subject to the potential restrictions which your institution has in its contract with CREF, you can retain the right to exceed the minimum required distribution and make additional withdrawals whenever, and for whatever amounts, you desire. If you have not depleted your CREF account by the time of your death, then the money will go to your named beneficiary.
If you retire before reaching age 70½, then you may find that your social security and other non-CREF income will produce enough funds for your living expenses. If this is the situation, then consider leaving your money in CREF and allow it to accumulate tax-deferred. In general, it would be preferable for you to spend principal from your after-tax investments instead of taking taxable distributions from your CREF account. A graph comparing the benefits of consuming after-tax savings before pre-tax accumulations follows. (See Exhibit Two.)
A more thorough explanation of the benefits of consuming after-tax savings before retirement accumulations can be found in my article, "Maximizing IRA Benefits," published in the September 1997 issue of Financial Planning.
Choosing the MDO will work best for participants who want to retain all of their options. In addition, choosing the MDO will often be the most effective means of providing for your heirs. By retaining control of your retirement funds, you have the option to vary the amount of money that you withdraw each year.
Finally, you could elect any combination of the above options. You withdraw some money and pay the tax. You could roll over part of your accumulations into an IRA and/or a Roth IRA. You could annuitize part of your accumulation. Finally, you could elect the MDO on the remaining amounts.
Only some of the options available to CREF participants are also available to TIAA participants. The limitations upon retirement distributions for TIAA participants are significant. First, the systematic withdrawal option is not available to TIAA participants. Second, depending on the contract between your institution and TIAA, you may not be able to make large lump sum TIAA withdrawals from your Group Retirement Annuities. Even if you are allowed, there is often a 2.5 percent surrender charge. Furthermore, these withdrawals can be made only within 120 days following termination of employment.
Unlike CREF, you are not permitted to roll over your entire TIAA accumulation into an IRA and/or a Roth IRA. In addition, the MDO with TIAA often restricts your withdrawal to the IRS mandated minimum amount. You can not--as you can with CREF--make withdrawals in excess of the minimum whenever and for as much as you like. You could find yourself in a position where you want more money from your TIAA accumulations and not be able to access the funds because of the severe limitations on your withdrawal options.
In addition, although a detailed analysis is beyond the scope of this article, in many cases, I think that the majority of long-term retirement assets belongs in the stock market, whether it be CREF, individually chosen stocks, mutual funds, or managed funds. One excellent source of information in the area of asset allocation is a book entitled Asset Allocation by Roger Gibson published by Irwin Professional Publishing. A good source of information on the specific TIAA and CREF investment funds is at their web site, http://www.TIAA-CREF.org. I also recommend a meeting or, if necessary, a series of meetings with your TIAA-CREF representative.
For both investment reasons and TIAAs distribution option limitations, I often recommend that clients consider changing their future allocations to more CREF and less TIAA. In cases where an even more aggressive approach is desired, consider the Transfer Payout Annuity (TPA) for a portion of your TIAA investment, particularly if your TIAA accumulation exceeds your CREF accumulation.
Transfer Payout Annuity
With the TPA, you may transfer a portion or all of your TIAA investment into CREF or the TIAA real estate fund. It takes ten years, however, to completely transfer all of your funds. A critical planning point is that you can begin transferring TIAA funds to CREF funds before you retire. Many participants should consider initiating a TPA on a portion of their TIAA funds ten years or more before retirement. The TPA will allow more options upon retirement, including the favorable terms of the MDO discussed above.
The downside of starting the TPA is that you may be shifting money from TIAAs excellent bond fund which provides a guaranteed return into a more volatile fund that will fluctuate with the stock market. In addition, TIAA, like fine wines, comes in vintages. A unit of TIAA purchased in prior, high-interest rate years is more valuable than a current unit purchased in years when the interest rate is low. By making the TPA, you may be transferring vintage TIAA. When you make the TPA, TIAA transfers a pro-rata portion of contributions from all years; you cannot elect to transfer only contributions made during the low-interest years.
For conservative investors who want added flexibility upon retirement, consider transferring some TIAA funds to TIAAs real estate fund. The real estate fund is an additional method of diversification and is not as volatile as the stock market. The real estate fund essentially follows CREFs flexible rules regarding distribution options.
Required Beginning Date
The Required Beginning Date (RBD) refers to that date when the participant must begin to receive annual distributions from his/her retirement accumulations. For years after 1996, the RBD is April 1st of the year following the later of the year in which the participant reaches age 70½ or retires. You cannot use the date you retire to determine the RBD for an IRA or for funds earned with previous employers. The minimum amount that must be withdrawn is calculated based on the actuarial life expectancy of the participant and the participants named beneficiary. The older the participant, the larger the minimum distribution amount. Please note that pre-1987 funds in 403(b) plans are not subject to minimum distributions until age 75.
Taking Distributions from Your Retirement Plan
If you would like to retain funds in the tax-deferred environment but do not want to incur a penalty, then you should take the minimum required distribution. The minimum distribution rules are based on the joint life expectancy of an IRA owner or TIAA/CREF participant and the owners or participants named beneficiary. The minimum distribution is calculated by utilizing actuarial life expectancy tables published by the Internal Revenue Service in Publication 590, which is likely to be revised this year.
Let us look at a minimum distribution (MDO) example for a TIAA/CREF participant who has named his spouse as the beneficiary and has one million dollars in his TIAA/CREF accounts. Assume that Doctor Wise is age 71 and his spouse is 65. According to the IRS tables, this gives him a life expectancy of 15.3 years and his spouse a life expectancy of 20 years. Their 22.8 year joint life expectancy is used to determine the MDO. Thus, the MDO for the first year is $43,859 ($1,000,000 ÷ 22.8).
To determine the MDO for subsequent years, you have a choice of two methods: the recalculation method and the term certain method. These are different methods of determining the life expectancies of both the participant and the primary beneficiary. Under the term certain method, on each anniversary of the RBD, you would subtract one year from your original life expectancy determination. Under the recalculation method, you recalculate your life expectancy each year. Note that as we age one additional year, our life expectancy decreases, but not by a full year. Using a higher life expectancy will result in a lower minimum required distribution.
To complicate matters further, you may choose to recalculate one life (usually the participant) and apply term certain to the other life (usually the beneficiary). For reasons beyond the scope of this article, the recalculation method for both spouses is usually not the wisest choice although it produces the smallest MDO amounts.
Minimum Required Distributions After Your Death
Assuming that your heirs could afford to leave the funds in the tax-deferred environment after your death, it would usually be to their advantage to take out the smallest allowable distribution. Upon your death, if your spouse is the beneficiary, then he or she could roll over your retirement account into the spouses own IRA. Your spouse could then use his or her own and a newly named beneficiarys life expectancy to calculate the required minimum distribution. This scenario, however, is subject to the minimum incidental death benefit rules which limit the deemed life expectancy of the beneficiary (usually the children) to no more than ten years younger than the participant (usually the surviving spouse). Alternatively, if your spouse is older than you were when you died, then the spouse could continue utilizing your distribution schedule. Note that a surviving spouse may use either the recalculation method or the term certain method for the surviving spouses newly named beneficiary.
For a non-spouse beneficiary, the general rule is that the beneficiary must take distributions at least as rapidly as the deceased participant. If, however, certain conditions are met and the proper elections have been made, then the beneficiary will be able to use his or her own age to determine the required minimum distribution. An advantage of naming a child (or even grandchild) as the beneficiary is that the childs life expectancy is so long that the required distributions and the resulting income taxes could be deferred for many years.
Taxpayer Relief Act of 1997
In August of 1997, the President signed new tax legislation into law which includes profound changes that will have far reaching implications for retirement and estate planning for physicians. For some, the legislation is almost too good to be true. The scope of the changes in the retirement plan area are so broad and so important for physicians that they are deserving of a separate article. I wrote such an article entitled "The New Roth IRAs: What Hath Congress Roth," which will be published in the May 1998 issue of The Tax Adviser, the most prestigious CPA journal in the country. Here are some of the more important considerations.
First, the new legislation permanently eliminates both the excess distribution and excess accumulation taxes. Avoiding these taxes was the major reason that some financial planners had recommended withdrawing funds from retirement plans before age 70½. Since avoiding these two taxes is no longer necessary, there is little motivation to withdraw funds from your retirement plans before you need the money (except for the gifting strategy previously discussed).
The tax bill also includes a provision which revoked the tax-exempt status of the TIAA/CREF organization. This does not mean, however, that TIAA/CREF will become a for-profit company. Although the law should have almost no impact on CREF participants, there may be a slight impact felt by TIAA participants. Recently, the CEO of TIAA/CREF stated that there may be a ¼ to ½ percent reduction in the dividends which are paid on TIAA accounts.
Roth IRAs And Roth IRA Conversions
More importantly, the legislation created a new type of IRA called the Roth IRA. Starting in 1998, you can make a non-deductible contribution of $2,000 if you are single and have an adjusted gross income (AGI) less than $95,000. Married taxpayers will be able to make contributions of $4,000 if their combined AGI is less than $150,000. The money will grow tax-free and withdrawals will be tax-free if the funds are held for five years and the IRA owner is age 59½ or older when distributions begin. In effect, the IRS is taxing the seed, not the harvest. All income and capital gains earned within the Roth IRA are never taxed. With regular IRAs, the income and capital gains are only tax-deferred. Another favorable feature is that Roth IRAs are not subject to the minimum distribution rules that apply to regular IRAs.
The following exhibit shows the accumulations in a deductible SRA or IRA versus a Roth IRA. Please note that we are assuming a 55-year-old is in the 28 percent tax bracket and makes a $2,000 contribution which is invested at 10 percent. All amounts shown are measured in after-tax dollars. (See Exhibit Three.)
What is even of greater interest to physicians is the possibility of converting a portion of your existing retirement plan to a Roth IRA. Although you have to pay income tax on the amount converted, the account grows tax-free after the conversion. Furthermore, if you elect to make a Roth IRA conversion in 1998, then you have the opportunity of pro-rating the income tax over a four-year period. In other words, if you convert $200,000 in 1998, then you will incur additional taxable income of $50,000 per year for four years. If you convert $200,000 in 1999 or later, then you will incur $200,000 taxable income in the year of conversion.
To qualify for a Roth IRA conversion, your adjusted gross income must be less than $100,000. The Roth IRA conversion is something every participant in a retirement plan should seriously consider. A Roth IRA conversion runs contrary to the general principle that it is usually better to postpone the payment of any taxes. In most of the scenarios that we have analyzed, however, the retirement plan participant--and particularly, the participants heirs--will have more wealth in the long run if the participant makes the Roth IRA conversion on at least a portion of the total retirement plan accumulation. The huge future income tax savings more than offsets the current income tax bite.
Regular IRAs are eligible for the Roth IRA conversion. To determine whether your retirement plan is eligible for conversion, the general rule is that all retirement plans that can be rolled into a regular IRA can be converted to a Roth IRA. The following chart shows whether your assets will likely be eligible for the Roth IRA conversion. (See Exhibit Four.)
RETIREMENT PLAN CONVERSION ELIGIBILITY TO ROTH IRAs, PROBABLE RESULT *
|CREF OR VANGUARD RETIREMENT ANNUITIES OR GRAS:|
(NO EMPLOYER MATCH):
403(B), OR 401(A), OR (K) FUNDS - EMPLOYER'S
AND MATCHED CONTRIBUTIONS:
|NON-EMPLOYER MATCHED PORTION:|
|*Employers can choose different options regarding "in-service" withdrawals from their Plans.|
As an example, assume Doctor Wise is 55 years old and chooses to make a $100,000 Roth IRA conversion. Doctor Status Quo is in an identical financial position except that he chooses not to make a conversion. Assume both doctors have $100,000 of after-tax dollars, they are in the 28 percent tax bracket, and their rate of return is 10 percent. The following chart shows the amount of after-tax dollars which both would accumulate. (See Exhibit Five.)
Now, start with the previous example and look twenty years into the future. Assume that each doctor dies at age 75, and they leave their IRAs and their savings account to their 45-year-old child. Assume the child makes annual distributions from the retirement account. The first distribution is $48,000 and the subsequent annual distributions are $48,000 increased by an assumed 4 percent rate of inflation. The following chart shows the after-tax balances in the funds. As you can see, the differences are staggering. (See Exhibit Six.)
This difference does not take into account the potential estate tax savings of making a Roth IRA conversion. Had that difference been considered, the results would be even more favorable for making the Roth IRA conversion.
There are, however, several potential disadvantages to Roth IRAs and Roth IRA conversions. The major disadvantage for many physicians is the problem of funding the income tax burden on the conversion. Another potential disadvantage is the possibility that the participants tax rate may decrease after retirement. The Roth IRA conversion also will not be favorable if the intended beneficiary is a charity. Finally, future tax law changes could jeopardize the benefits and even make the conversion disadvantageous. Roth IRAs and Roth IRA conversions are a dynamic possibility that could significantly enhance wealth and reduce taxes. I recommend that you seek professional guidance to determine whether converting would be beneficial to you.
Your Retirement Accounts Beneficiary Designation
If retirement plans constitute the majority of the assets in your estate, then the beneficiary designation of your retirement accounts (and not your Will) is the primary means to control the disposition of your wealth upon your death. Most physicians name their spouses as the primary beneficiary and their children as secondary or contingent beneficiaries to their retirement plans. Better options exist, however.
I usually recommend naming your surviving spouse as the primary beneficiary of your retirement account. The advantages to this are: (1) the spouse is the most likely object of the participants affection, (2) the spouse does not have to pay any federal estate tax on the retirement account because of the unlimited marital deduction, (3) naming the spouse is likely to decrease the minimum required distribution while the participant is still alive, and (4) the amount in the retirement account can be distributed over a longer period of time once the participant dies.
The primary disadvantage of naming your spouse as the beneficiary of your retirement plan is the potential enormous estate tax due upon your spouses death if the marital assets exceed $600,000. If the only funds available to pay the estate tax are retirement assets, then the payment of estate tax will trigger income tax. The combined estate and income marginal tax rate could be 80 percent or higher.
Plan Benefits Trust Beneficiary
If the total marital estate is more than $600,000 (which, under the new law, increases in increments to $1 million in 2007), then I often recommend creating a special trust called a Plan Benefits Trust (PBT). The PBT is designated as the secondary or contingent beneficiary to the retirement plan. The purpose of the PBT is to fund the unified credit shelter trust.
This PBT is created in addition to any trusts which you might establish in your Will. The terms of the PBT provide the surviving spouse with income for life and the ability to access principal for health, maintenance, and support. Upon the surviving spouses death, the remaining assets are distributed to whomever you choose, usually your children or special minor trusts depending on the age and maturity of your children. If the survivors make the proper election, then the income tax on the money in the PBT can be deferred. A sophisticated improvement to both the PBT and the B trust in A/B trust-type Wills is to allow discretion in the payment of income to the surviving spouse.
One of the main purposes of the PBT is to save $240,000 to $1 million in estate taxes for your children, while also protecting your surviving spouse. The PBT is especially beneficial to participants whose major asset is their retirement plan. Conventional thinking dictates that funding the unified credit shelter trust with retirement money is not ideal for many participants. The PBT utilizes pre-tax dollars to fund the unified credit shelter trust. Although not ideal, there oftentimes is not sufficient after-tax money to fund the trust. In most cases, funding the trust with pre-tax dollars is preferable to not funding the trust.
The PBT is especially critical for physicians because many of them have marital estates which exceed $600,000 but require the retirement assets to fully fund their unified credit shelter trust. Since your Will usually does not control the disposition of your retirement plan, the PBT is necessary to utilize the unified credit shelter trust and to maximize the estate tax savings to your heirs upon the surviving spouses death.
Naming a trust (i.e., the PBT) as the primary beneficiary of your retirement plan, however, is not the best choice in most circumstances. In most cases, I prefer to name the surviving spouse as the first beneficiary and the PBT as the contingent beneficiary. After the death of the first spouse, the surviving spouse could then either choose to inherit all of the retirement funds or disclaim $600,000 or less of the retirement funds into the PBT. [Note, however, that if your spouse is named as a joint annuitant of your TIAA/CREF account, then the disclaimer strategy will not work since the spouse cannot refuse an annuity benefit.] If your spouse is named as the first beneficiary, then your spouse will also have the option of rolling over the retirement funds into his or her own IRA.
Another advantage of naming the spouse as the primary beneficiary is that the spouse will not be burdened by a trust. In addition, there may be other funds which can be used to fund (either totally or partially) the $600,000 unified credit shelter amount which would make the PBT unnecessary. A final option is that the surviving spouse could keep a portion of the retirement account and disclaim the remaining portion into the PBT.
The advantage of the surviving spouse being able to disclaim the full interest of the retirement plan into the PBT results from the potential savings of $240,000 to $1 million in estate taxes for the children when the surviving spouse dies. The decision of whether the surviving spouse should inherit the retirement plan outright or whether the family would be better served utilizing the PBT often creates a tough choice. Many couples with long-term, trusting marriages where both spouses have the same children will prefer to let the surviving spouse make the decision after the first death when more relevant financial information is available. The mechanism to accomplish this goal is to name the surviving spouse as the primary beneficiary and the PBT as a contingent beneficiary. Disclaimer planning probably is not appropriate for second marriages where each spouse has his or her own children.
Instead of making restrictive decisions when you do not know future circumstances, the disclaimer/trusts strategy allows your spouse to make these important decisions later with more defined and current information. When will more information be known? At the time of your death. In addition, your spouse will have nine months after your death to make a qualified disclaimer. This ability to disclaim the benefits of the retirement account creates an optimal estate plan. Disclaimers have long been an important part of estate administration. Recently, sophisticated planners have been using the disclaimer as part of the planning process before a death has occurred.
For tax and administrative reasons, the plans beneficiary designation should not refer to your estate or even to a trust in your Will. The PBT should be a "stand-alone" document drafted in conjunction with your Will or living trust. In addition, the PBT must be submitted and approved by TIAA/CREF or the investment company that controls your retirement assets.
If you prefer giving your surviving spouse options while retaining the possibilities of substantial estate tax savings, then I recommend disclaimer-type Wills in addition to disclaimer-type retirement beneficiary designations. In both cases, everything is left primarily to the spouse, thereby allowing the surviving spouse to disclaim as much or as little as he or she likes into a trust for the spouses benefit. The drafter of the documents should provide for coordination of the PBT and the disclaimer trust under your Will. Under most circumstances, I recommend using an integrated fractional formula utilizing inter-textual language in both the Will and PBT to define the amount that will fund the trust. This is a fancy way of saying the combination of the Will and the PBT will carve out a total of $600,000 (or more as the unified credit amount increases) using a combination of pre-tax and after-tax dollars, depending on what is the most advantageous as decided by the surviving spouse after the first death.
Retirees have a wealth of options regarding their retirement plans. In most situations, the retirement plan participant and beneficiary will be best served by retaining as much money as possible in the tax-deferred environment (except for taking premature distributions under a gifting strategy). Many physicians will benefit by beginning to transfer a portion of their TIAA to CREF at least ten years before their planned retirement. Current retirement plan participants who have TIAA-CREF, Vanguard, and regular IRAs should also consider converting a portion of them into Roth IRAs. Annuitizing is a conservative strategy, but often an appropriate one for a portion of the retirement plan. The minimum distribution option will often be the wisest choice for the majority of the funds. Finally, physicians should consider establishing a coordinated estate plan that incorporates disclaimer-type Wills and disclaimer-type retirement plan beneficiary designations.
James Lange, CPA
Jim is a nationally-recognized tax, retirement and estate planning CPA with a thriving registered investment advisory practice in Pittsburgh, Pennsylvania. He is the President and Founder of The Roth IRA Institute™ and the bestselling author of Retire Secure! Pay Taxes Later (first and second editions) and The Roth Revolution: Pay Taxes Once and Never Again. He offers well-researched, time-tested recommendations focusing on the unique needs of individuals with appreciable assets in their IRAs and 401(k) plans. His plans include tax-savvy advice, and intricate beneficiary designations for IRAs and other retirement plans. Jim's advice and recommendations have received national attention from syndicated columnist Jane Bryant Quinn, his recommendations frequently appear in The Wall Street Journal, and his articles have been published in Financial Planning, Kiplinger's Retirement Reports and The Tax Adviser (AICPA). Both of Jim’s books have been acclaimed by over 60 industry experts including Charles Schwab, Roger Ibbotson, Natalie Choate, Ed Slott, and Bob Keebler.
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