George P. McCuen, CFP®, CPWA®
I was watching an episode of Bob’s Burgers recently and thought, I wonder if Bob’s family understands how to handle his retirement account once Bob kicks the bucket. If you aren’t familiar with Bob’s Burgers, it’s an animated sitcom about a third generation restauranteur (Bob) and his wife Linda (Bob calls her Lynn) and their three kids, Tina (oldest), Gene and Louise. This is a classic example of a small business owner providing for his family.
Let’s pretend this is their scenario; Bob has a pension plan for Linda and himself. Bob has no other employees working with Linda and him, and they’ve structured their pension in a way that allows them to pile a ton money for retirement. Bob is 65, Linda 63 and the kids are now adults. Bob is selling the restaurant since the kids don’t want to continue running it.
We’ll run with an episode titled; “Bob Flips His Last Burger.” The music stops playing, and the scene has Bob driving on the interstate on his way to the restaurant for the last time. Bob hits some black ice, swerves to correct his direction, rolls his car, and doesn’t make it out alive (I know, not a great way to start a sitcom, but I had to polish Bob off quickly to see how Linda will handle the money).
Linda finalized the sale of the restaurant and rolled her portion of their pension into an IRA in her name. Bob’s portion can also roll into Linda’s IRA since Linda is the primary beneficiary. It is called a spousal rollover allowing Linda to transfer Bob’s retirement money into her traditional IRA.
Linda can take money out as needed (no mandatory withdrawal requirements) and will only pay taxes on the amount withdrawn. Until Linda turns 70 ½, there are no required withdrawals. The three kids are primary beneficiaries of Linda’s IRA. Although Linda misses Bob, financially she is in great shape and had a seamless transfer of Bob’s retirement assets.
Let’s fast forward a few more years; Linda had a stroke at age 82 and died (she will have taken required minimum distributions since turning 70 ½). How does this play out?
In the year of Linda’s death, the required minimum distribution, based on her age (82) must be taken by December 31. The balance of her IRA will be split three ways, 1/3 for each child.
The kids can take all of mom’s money at once as a lump sum (it will all be taxable that year) or they can, as the beneficiaries, opt for getting paid out annually over their life expectancies. This is called a Beneficiary IRA and also known as a stretch IRA; you are stretching out the distributions over the lifetime of the beneficiaries and, only paying taxes on the amount withdrawn each year versus a lump-sum distribution with taxes due all at once.
What if Linda named their trust as the beneficiary? Tina, the oldest beneficiary of her trust will be treated as the designated beneficiary if the trust meets certain requirements. The oldest beneficiary’s age will be used for withdrawal calculations. If the trust fails to meet these requirements, then distributions must be made under the five-year rule. [Using a trust as a beneficiary should only be done after seeking advice from qualified counsel. Typically you want to have people or entities named as beneficiaries.]
Finally, what happens if Linda was so distraught after Bob’s death that she failed to name any beneficiaries? In this scenario, the kids will have to take withdrawals from the IRA based on Linda’s life expectancy until the IRA is depleted. This can take many years and Tina, Gene, and Louise won’t have full access to mom’s IRA money – rats!
I used this silly sitcom to illustrate a point that we are questioned about on a regular basis. IRA beneficiaries have some very good options with how to deal with sudden money. This is also a good reminder to look at how your beneficiaries are listed on your retirement accounts, including 401(k), 403(b), 457, etc.
The good news is that all my facts are made up. Bob is still making burgers, and Linda is as happy and optimistic about her kids as always. Bob’s Burgers has a burger of the day in each episode, and for this episode the burger of the day - Rest in Peas Burger – comes with peas and carrots.
If you have questions about this or other topics, email me at firstname.lastname@example.org.