Answers in Retirement Plans

Yes, you can name your living trust as the beneficiary of a 401(k) plan account. However, if you do, you must be absolutely sure that the trust meets 100% of the requirements that a trust must meet to allow your beneficiaries to enjoy all of the tax advantages that they would enjoy if they were named outright.

Ask the attorney who wrote the trust for you if the language of the trust includes all that it should to allow you to accomplish everything you want for your beneficiaries. And, although I am sorry to have to mention this, you must make sure that the attorney understands your question and understands all the rules and laws that the trust must meet so that your beneficiaries have all the flexibility that they are supposed to have if the trust was written properly. This is critical and just one slip up could ruin the tax benefits that are available from a properly written trust.

When we set up a 401(k) plan for a company and speak at the enrollmet/education meeting for the participants, we normally suggest that the participants do not name a trust as a beneficiary until they have double checked everything I metioned above has been verified with the attorney that drafted their trust.

The simple answer is YES, typically you can.

However, please consult with your attorney on the specifics of doing so. In some states, the trust may not be treated as an "individual" and might cause the 401(k) to be "force distributed" either immediately, or over a 5-year period. I do know that in Florida, laws have been specifically written so that trusts ARE treated as individuals and therefore can "stretch" the 401(k) - meaning that the beneficiaries of the trust can take only the required withdrawals from the 401(k) (now in the trust) in order to satisfy the required minimum distribution requirements of the IRS code. But I do not know how other states treat inherited qualified money in trusts.

The most common beneficiary structure we see is: Primary Beneficiary: Spouse Contingent Beneficiary: Trust

This gives the spouse the opportunity to "disclaim" the 401(k) and have it go into the trust (of which he/she is a likely beneficiary anyway) if it makes sense during postmortem planning.

But - since you already have a Trust - you already have an attorney. Please call your attorney and get his advice on the best structure for your situation. There are several instances I can think of which may require that he modify your trust, or create what are called "subtrusts" in the event that your trust beneficiaries are of significantly varying ages.

The SEP IRA is generally going to be a better option for most small business owners. None of the other retirement options, including the Individual 401k, offer the same flexibility or are anywhere close to as easy to administer. And as a small business owner, you don't want to be wasting your time or yoru accountant's time with plan administration.

I'll put it to you like this: I invest my own retirement savings in an SEP IRA.

Like most financial decisions, there are pros and cons to the various options but boiling it down, individual 401k allows for greater contributions at the same income level and also allows for loans up to 50% of acct balance whereas a SEP-IRA (which would be the IRA of choice for most business owners) has less administration and can accomodate additional employees.

Hi Ram, This question is best answered by your C.P.A. and/or your retirement plan administrator. This form is used to report the tax on various items related to retirement plans. You may also contact the Internal Revenue Service, if you would rather not employ a retirement plan administrator or C.P.A. All the best, Dave

Some things to consider about the riskiness of an investment in raw land:

1. A value investor would tell you that the riskiness of an investment is first and foremost a function of the price paid. If you pay too much for ANY investment--be it a stock, a bond, or a tract of land--you put yourself at risk or long-term or permanent loss.

2. With leverage comes risk. If you pay cash for the land and pay a reasonable price, then your biggest risk is that of opportunity cost (i.e. the risk that you could have gotten better returns elsewhere). But if you mortgage the property, you put yourself at risk of financial distress if your income were to take a short-term hit and you were unable to service the mortgage. The use of leverage can take a relatively low-risk asset and turn it into a high-risk asset.

3. It's debatable whether raw land qualifies as an "investment" at all unless you intend to generate revenues from it via farming or ranching rights or intend to build an income-producing property on it. If you are buying land hoping for nothing more than capital appreciation, you have officially become a land speculator. There is nothing inherently wrong with that, but investing and speculating do require different mindsets and a different attitude towards risk.

You are fortunate to live in an area where price appreciation has continued to be robust. Farm land is still an area that continues to see price appreciation and if you are in an area that continues to see employment growth, then you may continue to benefit from prospective real estate development.

While an investment in raw land is generally considered a high risk for the reasons noted above (lack of liquidity, no income, uncertain development), your question brings into focus the value of diversification.

If the investment in land were your only investment, then your portfolio risk would compound the individual asset risks noted. But if you consider the investment in raw land to be akin to an investment in "alternative" assets such as those utilized by pension funds and endowments, then you are bringing the overall risk of your total portfolio down. In this context, then the investment is lowering your overall risk.

Obviously, to what extent this is a high or low or medium risk for you and your portfolio depends on the total allocation into land compared to your entire portfolio.

One thing to consider: REITS do offer a way to at least receive income while awaiting price appreciation. And if you sell off the land and it's not sheltered by the primary residence exclusion you referenced, you may want to consider the tax-deferred advantages of a 1031 Exchange into a REIT.

While your plan offers you the option to borrow, you need to be aware of any restrictions put in place by the plan administrator. Such information may be found on the administrator website or in the plan's summary document available from the administrator or possibly your HR representative.

Generally, if the plan allows loans, the rule is you can borrow up to 50% of your vested balance to a maximum of $50,000 IF you had no other plan loan in place in the 12 month period ending on the day you apply for the loan.

In your case where you have a plan loan outstanding, then the new loan is limited. It is the lesser of 50% of the vested account balance or $50,000 minus the outstanding loan balance in the preceding 12 months.

In addition to the minimum loan amount noted previously, your plan administrator may restrict the reason for the loan to a list of approved reasons (for example, uninsured medical expenses, college tuition, purchase of a primary residence).

Just because you can get a loan from your 401k doesn't mean that you should. Sure, it is convenient, fast and relatively inexpensive. Yes, you are "paying yourself" for the borrowed money and not a credit card company or bank. Yes, the interest is tax-sheltered and there is no tax consequence for receiving funds as long as you pay it back.

But if you are nearing retirement, may be changing jobs or are facing a lay-off in the near future, need the proceeds for meeting daily living expenses (as opposed to some extraordinary or large capital expense) or are using your 401k like a piggy bank to buy luxury items or pay for a vacation, then the answer is simple: Don't do it.

Mr. Castillo, First call Tustin Nissan and ask to speak to the person in charge of the 401k plan. They should be able to give you a direct phone number to the benefit provider. Call the provider, expect to have to identify yourself with several personal questions and they should be able to give you balance and benefit information.

Sit down with a pen and paper (or spreadsheet; I'm a little old fashioned) and play with the numbers. How much in annual income does your current pension promise? What rate of return would you have to generate on your investments to equal that payout?

You basically have two options if you take the lump sum.

1. You can invest it (with or without a professional advisor) in a portfolio of stocks, bonds, REITs, and other income producing assets. If the income portion is enough to meet your current needs along with Social Security, you can let the principal grow, untouched. (This may not be possible, depending on the size of the lump sum and your current needs).

2. Annuitize the lump sum with an insurance company and guarantee yourself a given income for life. This only makes sense if the annuity company is offering a higher payout than your original pension, taking into consideration any inflation guarantees.
   

The first option gives you maximum control and allows you the most flexibility to leave an inheritance to your heirs. But, again, you may require more income than this option can provide, and if you take regular portfolio drawdowns you risk outliving your money.

Hi Francisca; All the answers above are all excellent, so I won't re-plow that ground other than to say my biggest concern might be inflation. Most people are living much longer; and, if you're married, retirement might mean two lives over three decades - what did a stamp cost in 1982? Considering the debt this country has been piling up, the odds are pretty high (I think) that the government will be printing money to pay if off for some time to come... and we may see the consequences of that for a good many years. When you take a lifetime income, the benefits (cited above) are great provided a dollar continues to buy what it used to; but you are giving up control and the ability to adjust later... and thirty years is a long time.

Hi Francisca, I think your question is going to be more and more common as companies and state/local governments consider reducing pension benefits due to revenue/expense problems. There are pros and cons to both of the approaches you mention.

On the lump sum side, tax is an immediate concern. Usually the easy way around that problem is to simply roll your lump sum distribution to an IRA. From there (assuming you're past age 59 1/2), you can tap into the IRA as needed, convert part or all of it to an immediate annuity (thus creating your own personal "pension"), or just let it continue to grow. You typically have more beneficiary options with an IRA than a pension distribution, so that may be another reason to roll it to an IRA. One challenge of taking a lump sum distribution though is that you have to make the investment decisions. If you roll to an IRA, for instance, and do not convert some of it to an immediate annuity, then you will not have lifetime guaranteed income as you would by taking lifetime payments.

On the lifetime payment side, a big plus is guaranteed lifetime income (assuming your company/state government doesn't ever reduce your benefits--that's happened several times with corporations in the past and I read a story earlier this month of some county/city governments in CA that are now reducing pension benefits). Another big plus is you don't have to worry about managing the money that's generating your lifetime payments. Inflation can also be a concern for lifetime payments that are not adjusted for inflation; over a couple decades in retirement, inflation of even 3-4% can cut your purchasing power in half. And as I mentioned, taking lifetime payments through your employer (corporate or government) may expose you to the risk of reduced benefits sometime in your retirement.

Hopefully these ideas will give you some food for thought! Mike

Francisca - adding to Evan's answer - consider your intentions for the assets beyond your lifetime - do you want to leave a legacy for your heirs (family members, charities, etc)? Which option gives you the most control of the assets with regard to that goal?