Articles on Pension Distributions

The American Dream IRA was discussed in The Wall Street Journal article, Proposed New IRAs May Benefit. . .Oops. . .the Rich, by Ellen E. Schultz (7/18/97, pp. C1, C23). This is a typical press article with the viewpoint that no tax provision should ever benefit anyone of means. While negatively mentioning the provision that allows tax payment provisions to stretch over four years, the author fails to mention the huge windfall in tax collections that would likely result. The article acknowledges the financial advantages to participants (i.e., the "rich") in converting their existing plans to American Dream IRAs, if passed as proposed.

Bloomberg Personal (July/August, 1997), Tax Break or Trap?, by Mary Rowland (pp. 133-134).
This article deals with the three year window (1997-1999) issue of whether or not to make plan distributions while there is no 15% excise tax on distributions. We cringed when we saw the the president of Brentmark Software apparently cited for the proposition that it takes seven years for tax-deferred growth to overcome the 15% tax! Further down in the article it was noted that this based on a particular fact pattern. [Editor's note: Of course, every fact pattern is different. The crossover point where tax deferral becomes better than taking a distribution during the three year window can be anywhere from 0 years to 30 or more. Under some fact patterns, there is no crossover point.]

Registered Representative (March, 1997), Window of Opportunity...or Tax Trap?, by Michelle Gabriel (pp. 90-91).
This brief article comes to the conclusion that taking advantage of the three year window is only for a certain few. Most of this article consists of a number of reasonable quotes by financial planners on the issue. However, the article is a little light on the technical side and its use of the $155,000 indexed threshold value (which became $160,000 in 1997) does not inspire confidence by an informed reader.

Dow Jones Investment Advisor (March, 1997), Funding the Grandkids' Retirement, by Mary Rowland (pp. 125-126).
This is a very intriguing piece starting with a discussion of William T. Knox's reasons why naming a nonspousal beneficiary may be a better idea than naming a spousal beneficiary. Just as interesting is a discussion of Seymour Goldberg's IRA Trust idea, which involves using an irrevocable trust set up to receive money from a grandparent's IRA and pass it to a custodial account for a grandchild. Well worth reading.

Journal of Employee Benefits (January/February, 1997), Recent Rulings Enhance Pension Plans and IRA Early Distribution Options, by G.E. Whittenburg, William Raabe, and Jennifer Deutsch (pp. 216-221). (Subscriptions: $175 from Warren, Gorham & Lamont, RIA Group, 31 St. James Ave., Boston, MA 02116-4112, or call 1-800-950-1205.)
We found the preceding article to be the best one we have yet seen on the issue of taking early withdrawals from a pension plan without incurring the 10% penalty tax. The title of the article does not do it justice since it is not just a review of recent rulings, but has detailed coverage of the exceptions to the 10% penalty.

Journal of Employee Benefits (January/February, 1997), Temporary Suspension of Excise Tax Does Not Always Warrant Large IRA Withdrawals, by William D. Cunningham (pp. 210-215).
This article discusses some of the reasons why one might want to take advantage of the three year window to make distributions without incurring the 15% excise tax on excess distributions. Particularly noteable is the point that if death within the next three years appears likely, an early withdrawal in order to avoid the excess accumulations tax may be a good idea. However, we cannot agree with the suggestion that if the remaining tax deferral period is less than 17 years, a distribution should be considered. The 17 year period discussed in the article should be seen as being predicated solely on the sample fact pattern used in the article. Brentmark's Pension & Excise Tax Planner software shows that the crossover point where tax deferral is superior is frequently in the 7 to 10 year time frame and is often shorter (sometimes 0 years) or longer depending upon the particular fact pattern.

A recent study (Working Paper 5815, published 11/1/96) authored by John B. Shoven and David A. Wise for the National Bureau of Economic Research, The Taxation of Pensions: A Shelter can Become a Trap, is being cited by some in support of the idea of an early cash-out being advantageous assuming retirees live long enough. (Most others argue for maximization of tax deferral being more advantageous the longer the parties live.) Check out their web site for ordering information or send a $5 check made out to NBER to Working Papers, NBER, 1050 Massachusetts Ave., Cambridge, MA 02138-5398, or use a credit card with a call to 617-868-3900, a fax to 617-349-3955, or an e-mail to orders@nber.org. (The study takes the position that it is almost always better to pay the excess distributions tax, if necessary, in order to avoid the excess accumulations tax! Our initial review does not agree with the studies' conclusions. Although the studies conclusions appear to be wrong, they seem to be playing a big part in leading to possible repeal of the 15% excise taxes.)

Estate Planning (May, 1997), Naming Children as Beneficiaries of Retirement Plan Assets, by Martin Silfen (pp. 163-171).

Trusts & Estates (April, 1997), Who Benefits from the Suspension of Sec. 4980A's Excise Tax?, by Al W. King III (pp. 14, 16-18, 70).

Personal Financial Planning (May/June, 1997), Planning for Excess Retirement Plan and IRA Distributions: Part 1, by William F. Brown (pp. 26-30).

Dow Jones Investment Advisor (April, 1997), Dealing with Devilish Details, by Mary Rowland (pp. 135-6).
This article details with errors that occur in beneficiary designations. A typical well written and informative article by Mary Rowland. Dow Jones Investment Advisor (a monthly publication) is worth subscribing to just to read Mary Rowland's Pension Advisor column. And we are not just saying that just because she mentioned Brentmark's web site! Subscriptions are $79 per year from Dow Jones Investment Advisor, P.O. Box 7930, Shrewsbury, NJ 07702-7930.

Newsweek (3/24/97), No Time to Waste (pp. 84-5) and The Savings Trap (p. 86), by Ellyn E. Spragins.
The Savings Trap merely parrots the questionable views of the Shoven and Wise study. No Time to Waste discusses the three year window, pre-59½ withdrawals, and required beginning date withdrawal options. The latter article is the better of the two technically although it misses the boat at various points. For example, it claims there is no advantage to naming a nonspouse beneficiary who is 20 years younger because the biggest age difference allowed is 10 years. But there's no mention that this MDIB rule need no longer be applied after the death of the participant and there's no mention whatsoever of the hybrid method. Contrast the weakness of these two Newsweek articles with the excellent ones found regularly in Forbes.

Forbes (3/24/97), The donated IRA, by Laura Saunders (pp. 182-3).
This article deals with charitable gifts from IRA assets. Unlike most such Forbes articles, it is not available on the Internet.

Trusts & Estates (January, 1997), Leveraging an IRA's Tax Deferral Into Multi-Generational Wealth, by John A. Herbers (pp. 10, 14, 16, 18).

Lawyers Weekly USA (1/27/97), Estate Planners Are Facing New Malpractice Danger From IRAs (Applies Even to Estates Under $600,000), by James L. Dam (pp. 1, 14-15).

Trusts & Estates (January, 1997), Some Scenarios For Salvaging A Spousal Rollover, by Kevin R. Armbruster and William M. Ellard, (pp. 52-58).

Personal Financial Planning (January/February 1997), Financial Planning for Retirement Benefits: Part 1, by Thomas R. Robinson and Lawrence C. Phillips (pp. 3-8).

Personal Financial Planning (January/February 1997), Purchasing Life Insurance with Qualified Plan Funds, by Richard A. Vaughn and Theodore M. Feher (pp. 12-18).

Estate Planning (February, 1997), Paying Qualified Plan and IRA Benefits to a Credit Shelter Trust, by M. Read Moore (pp. 83-89).

Probate & Property (November/December, 1996), Tax Planning for Retirement Plan Distributions, by Gerald S. Susman (pp. 30-34).
This article is a good discussion of QTIPing an IRA for a surviving spouse and a general overview of the numerous taxes that can apply to a retirement plan.

Probate & Property (November/December, 1996), Qualified Retirement Plans: Frequently Asked Questions, by Louis A. Mezzullo (pp. 15-19).
This is a succint review of the major planning issues that arise in this area.

Some of the best articles on pension distributions tax planning have appeared in Forbes magazine. The 3/9/98 issue contained an article on Roth IRA issues by Laura Saunders. The 11/17/97 issue contained the article, Rothify now, by Carolyn T. Geer (pp. 180-1). It is a very pro-Roth IRA conversion article and is well worth checking out. The 6/16/97 issue (pp. 180, 184) included the article, Tough Choices, by Laura Saunders, which discusses minimum distributions options such as the "hybrid" method. The 3/24/97 issue (pp. 182-3) had an article, The donated IRA, by Laura Saunders, dealing with charitable gifts from retirement assets. Following are Forbes articles which are available on the Internet. The Doing Well article deals with reasons for setting up a charitable remainder trust as beneficiary. The Questions article deals mainly with stretchout IRAs, i.e., those concerning a young beneficiary. Final Payments deals with Ten Commandments for IRA owners approaching age 70½.

• King Lear, updated (3/9/98)
• Rothify now (11/17/97)
• Tough Choices (6/16/97)
• Doing well by doing good (3/10/97)
• Questions you didn't ask but should have (8/26/96)
• Final Payments (6/17/96)
• Endgame (6/19/95)

The most significant tax on large pensions plans is usually the Federal Estate Tax. See Repealing the Federal Estate Tax for various articles discussing the possibility of repealing this tax.