Here’s the nitty-gritty on naming a trust beneficiary, plus insights on trust mechanics and taxation, and why bequeathing a Roth IRA appeals to many investors. Owners of a 401(k) plan or IRA account, depending on their estate and legacy-planning goals, have the option to name a trust as a beneficiary instead of an individual (e.g., spouse, child, grandchild, etc.). In last week’s column, I covered the strict, complicated, and cumbersome IRS rules to be followed so that the oldest trust beneficiary can use his/her own life expectancy to determine post-death payouts, including the requirement that the trust qualify as a “look-through.” So long as the trust qualifies, the “stretch” technique (whereby payments can be “stretched” out over a period of time) can be utilized. Instead, assuming the trust qualifies as a “look-through,” you must use the life expectancy of the oldest trust beneficiary for required minimum distributions (RMDs). For this reason, anyone naming multiple trust beneficiaries ideally should see that they are close in age. Further, if any of the trust beneficiaries is not an individual (e.g., estate, charity), there would be no designated beneficiary for distribution purposes, even if the trust qualifies as a look-through; thus, trust beneficiaries would not be able to stretch post-death RMDs over the life expectancy of the oldest beneficiary. If the trust fails to qualify as a look-through, then it has no life expectancy. Generally, the entire account must be distributed to the trust within five years. [+] Read More

One of the reasons investing gets confusing for most people is that there are too many rules, requirements, products/options, and terms. The website “Investopedia” claims to have a “comprehensive financial dictionary with over 13,000 terms and counting.” Insanity! The world of retirement planning – which is just a subset of investing – is not much better. But the definitions do matter. A 401(k) withdrawal, for example, could mean paying penalties and taxes that could cost you dearly if done wrong, or done at the wrong time. A 401(k) rollover, on the other hand, could provide you with several benefits and advantages for moving your retirement plan in the right direction. In this case, a single word makes all the difference – and not knowing it could cost you. [+] Read More