Where Do You Do Your Shopping?
Part 38
Thomas M. Boles, 33, G.C.
1761 East Woodcrest Avenue
La Habra, CA 90631-3260

Retirement planning means taking into account tax consequences.

Last month, I repeated some of the fundamentals of Charitable Trust, and elaborated on Annuity Trust, Unitrust, and Split-interest Trust. As a result of repeating this information, I have received requests about retirement planning and possible tax consequences.

As you know, retirement planning has come a long way in the twentieth century. Now, it seems to be widely accepted that employers should set aside something for their workers. The government even encouraged this concept with favorable tax consequences for setting up “qualified retirement plans.” We have, however, found limits to how much can be contributed to a qualified retirement plan, and there can be adverse tax consequences for taking out or accumulating too much money. This creates a planning dilemma for the person who would like to put away more for retirement and realize the double tax benefits of current income tax deductibility and tax-sheltered growth.

Generally, the entire amount of distributions from a qualified retirement plan is subject to income tax. CAUTION: If annual distributions exceed the allowable limit, excess distributions over that limit will be hit by an additional 15 percent excise (penalty) tax. Currently the limit is $160,000, which is indexed annually for inflation.

As a rule, employee participants in a qualified plan must start receiving distributions by April 1 following the year in which they reach 70 and a half years old or retire, whichever is later. However, distributions both from IRAs and to those who own five percent or more of a business cannot be delayed beyond April 1 following the year the recipients reach 70 and a half. And the minimum distribution each year is your account balance divided by your remaining life expectancy (or the joint life expectancy of you and your spouse or other designated beneficiary). This means that when a fund with a significant accumulation for the year which causes the balance to exceed $160,000, the excess over $160,000 will be subject to the 15 percent penalty tax.

Note: The Small Business Job Protection Act of 1996 did suspend this tax on excess distributions for the years 1997, 1998, and 1999. Unfortunately, this penalty also applies to excess accumulations remaining in a retirement fund at the death of the owner, and the temporary relief from the tax on excess distributions does not apply to excess accumulations. Something to think about: A fund may accumulate an amount equal to the present value of a $160,000 annuity for a person the age of the decedent. Anything more than that is subject to the 15 percent penalty tax. (The $160,000 annuity amount, like the $160,000 distribution ceiling, is adjusted annually for inflation.)

While the penalty tax applies only to excess retirement-plan accumulations, the federal estate tax can apply to all accumulations. It is potentially the most severe of all taxes. If an estate is subject to federal estate tax, the rates start at 37 percent and go up to 55 percent. Contributions to qualified retirement plans are sheltered from taxation in the year they are made, and they grow tax-free within the plan. However, when these accumulated funds are eventually distributed, they will be fully taxable. Following the death of the owner, the income tax will be paid either by the estate or by the person(s) receiving the funds. An income-tax deduction is allowed for the portion of the estate tax paid to the federal government--but even so, the tax can be significant.

Next month, I’ll touch on the subject of deferral of taxes when your spouse is the beneficiary, and how you can reduce taxes by choosing the right asset for a charitable gift. Which leaves my “ad” for this month to read:  Your estate is one of a kind, and your attorney is truly your guide for smart shopping! 

To receive more information on the benefits of giving appreciated assets to the Scottish Rite Foundation, S.J., USA, print this web page, fill out the requested information, and mail to the address below:

For an investment of securities and/or real estate, please run a calculation and send it to me based on an investment of $__________. Assume the cost basis of the asset (what was originally paid, less depreciation) is $__________.

My birth date is _________________; My spouse’s is _________________.

Name ____________________________ Date _______________________

Address _______________________________________________________

City _________________________ State ________ Zip _______________

Send to: Scottish Rite Foundation, c/o Thomas M. Boles, 1761 East Woodcrest Avenue, La Habra, CA 90631-3260

Brethren Benefit From Pooled Income Fund
What is one of the better ways you can benefit yourself and your family and, at the same time, support the Scottish Rite and its Childhood Language Disorders Program? The answer is simple: The Scottish Rite Pooled Income Fund!

The Scottish Rite Pooled Income Fund allows you and, if you wish, your wife and/or other beneficiary(ies) to receive a worry-free lifetime income as well as attractive tax benefits by joining the Fund via a financial gift to The Scottish Rite Foundation, S.J., USA. For more information call, 1-800-486-3331 or fax 202-387-1843.

Grand Commander Kleinknecht will personally respond to your inquiry. If he is not available, please leave your name and number, and the Grand Commander will return your call at his earliest opportunity. Through the Scottish Rite Pooled Income Fund, you can do well for yourself and your family while also doing good for others!