Retirement Planning by Natalie Choate: A Review

Americans have over $25 trillion in various tax favored retirement vehicles. They are called tax favored because they grow free of income tax. Albert Einstein said two things most of us can understand and agree with: (1) compounding is the most important power in the universe and (2) the hardest thing in the world to understand is the income tax. A corollary we can derive is that income tax free compounding is the most important aspect of successful financial planning.

“…income tax free compounding is the most important aspect of successful financial planning.

The Congress permits workers (whether self-employed or working for another) to use that feature through various tax favored vehicles or plans. As mentioned above, it permits income to accumulate income tax free (or at least be deferred which is the next best thing to tax avoidance). The tax law also permits contributions to such plans to be deducted for income tax purposes or not even be taken into income when the contribution is made to the plan. Hence, the plans provide two tax benefits: a deduction for the contribution (or the avoidance of it being included in income) and tax-free growth.

However, taxpayers may pay many prices to use these arrangements. First, they face many complications, not the least of which is that there may be multiple choices with various names from qualified plans, Section 401(k) plans, HR 10 plans, money market plans, defined benefit plans, defined contribution plans, employee stock ownership plans, individual retirement accounts (commonly known as “IRAs”) and Roth IRAs, among others. Second, extra taxes or penalties may be imposed if the rules relating to these vehicles are not strictly followed: penalties for making contributions too early, too late, too small or too great and penalties for taking distributions from these plans that again are too early, too late, too small or too great. These rules are not intuitive at all but rather among the most complicated and convoluted in the tax law, which itself suffers from those same attributes.

To top it all off, interests in these plans typically suffer the greatest cost as they usually are subject to both estate tax and income tax when the person for whom the plan is held dies. And, unlike almost any other asset owned, estate planning tax reduction for such interests is almost impossible to achieve.

The key to the effective and efficient use of such vehicles is careful compliance with the law and careful and creative planning. The law relating to such plans, however, as indicated, is not intuitive and is essentially sui generis (unlike any other area of law).

Why this book matters

Natalie Choate, a graduate of the Harvard Law School, primarily devotes her practice to work on such plans. Her treatise, “Life and Death Planning for Retirement Benefits“, is regarded by many practitioners and counselors in the field as the bible for such work. Her book is extremely comprehensive and explains the horribly complicated rules in a clear and concise manner. It is loaded with multiple examples of how the law works, how it can work against the taxpayer and how it can work for the taxpayer. There is simply no source in this area that comes close. The importance of her treatise to all who toil in the retirement planning field is reflected by the 50,000 copies of the book that have been sold.

The book provides step-by-step guidance so advisors and their clients can accomplish appropriate planning in virtually all areas with respect to such vehicles. That includes complying with the minimum required distribution rules for spouses, minors and charity, dealing with inherited plans, making qualified disclaimers with respect to these vehicles to change the post-death results of such plans, complying with the special rules for Roth IRAs, transferring plan interests to trusts, implementing proper investment decisions (including dealing with stock in an S corporation and other non-traditional portfolio assets).

A softcover version Life and Death Planning for Retirement Benefits may be ordered or can be obtained in the cloud as an e-book which allows her work to be word-searchable, to use dynamic links and to access updates automatically.

No person who deals with retirement plans can afford to be without this remarkable work. It is exceptionally well written and has made Ms. Choate the star of this area of practice as reflected by the tremendous high demand for her on professional lecture circuits.

Jonathan BlattmachrMr. Blattmachr is a Principal in ILS Management, LLC and a retired member of Milbank Tweed Hadley & McCloy LLP in New York, NY and of the Alaska, California and New York Bars. He is recognized as one of the most creative trusts and estates lawyers in the country and is listed in The Best Lawyers in America. He has written and lectured extensively on estate and trust taxation and charitable giving.