Don?t Let Uncle Sam Take 80% of Your IRA
(ContentDesk) May 31, 2004 -- Could you lose over 80% of your IRA to taxes when you die? Yes, unless you act before it's too late. Read on to find out if this affects you and how you can minimize the effect of taxes on your IRA.You've worked hard all your life and enjoyed a successful career. Along the way, you've sacrificed to put money into retirement programs, building a nest egg to provide for you and your family the rest of your life. If you live just off the interest, you can leave a nice inheritance for your children.(Mr. Voudrie responds to questions from readers on an almost daily basis.
If you would like clear, straightforward, unbiased answers to your financial questions, contact e-mail protected from spam bots)Unfortunately, Uncle Sam could take over 80% of it in taxes, leaving your children with much less than you expected. If you owe estate taxes at your death and haven't planned properly, your children may be forced to tap into your retirement accounts. This could result in 35% being lost in income taxes on top of 48% being lost to estate taxes!There are two kinds of taxes that affect IRAs and other pre-tax accounts. The first is income tax.
When money is withdrawn from these pre-tax accounts, ordinary income tax is paid on the full amount withdrawn.
Withdraw $50,000 from your IRA, pay income taxes on $50,000.Since IRAs and other retirement accounts have a beneficiary and, typically, are not subject to Probate, many people think they're not subject to estate taxes. That's wrong. The full value of these accounts is included in the value of your estate and may be subject to estate taxes. What's worse, the value of your estate isn't reduced by the income taxes due if you pull money out of these pre-tax accounts. For instance, let's say you have $1,000,000 in an IRA.
Even though you would only have about $650,000 if you took it out and paid income taxes on it, the full $1,000,000 might be subject to estate taxes.Each of us has an estate tax exemption of $1,500,000 for 2004. If you're married, that means you and your spouse should be able to pass on $3,000,000 before worrying about estate taxes. But couples with smaller estates can still end up paying estate taxes.For instance, Bill and Sue are happily retired. Bill retired and rolled $1,000,000 into a Traditional IRA. Sue also had an IRA worth $500,000.
They owned a home and other real estate bringing the value of their estate to $2,500,000. Since his IRA would be his wife's main source of income when he died, Bill named Sue as his primary beneficiary. He passes away and also leaves the rest of his share of the estate to Sue.
There aren't any estate taxes or income taxes on transfers between spouses.The problem occurs when Sue dies. The value of the estate is $2,500,000.
She can only pass $1,500,000 free of estate tax. The result is roughly $500,000 in estate taxes must be paid 9 months after her death.Since the IRAs are the only source of readily available funds, the children withdraw money from Bill's IRA. This means that almost $350,000 more is due in income taxes. How are they going to pay those additional income taxes? By taking more money out of the IRA. So the have to pay even more in income taxes! Ultimately, very little of the IRA is left for the children.What can you do if your largest asset is an IRA and you face a similar situation? You can reduce the amount of estate taxes owed through the use of special trust vehicles.
Additionally, the portion of an IRA or estate that is not left to a surviving spouse counts toward the decedent spouses' exemption, so leaving a portion of an IRA to a child instead of a spouse can reduce estate taxes. Life insurance can be used to provide the liquidity needed so that the children don't have to tap the IRAs for funds to pay the estate taxes.Consult with a qualified professional to properly take advantage of these complex strategies. But act now, because these strategies are only effective while you are still alive. I regularly respond to readers email, so if you have questions about this or other financial topics, write to me at e-mail protected from spam bots.Mr. Voudrie is a Certified Financial Planner, a nationally syndicated columnist and the President of Legacy Planning Group, Inc., a Private Wealth Management firm in Johnson City, TN.
For more information call 1-877-827-1463 or visit www.guardingyourwealth.com.Looking for an energetic expert who is passionate about financial and wealth management?
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For booking information, contact Christine Lavender at (877) 827-1463 or email e-mail protected from spam bots.Related Articles can be found at www.guardingyourwealth.com under the Guarding Your Wealth Article Archive:How To Make Millions LegallyHow To Stretch Your IRA ? Tax Free.
Creating Estate Tax Savings For Your Child Using A Roth IRA
Parents must give serious thought to protecting their family through estate tax planning. While life insurance and trusts should be a part of every plan, Roth IRAs can be a simple tool for passing money to your child on a tax-free basis. Roth IRA First, we need a quick summary of the Roth IRA. A Roth IRA is an after-tax retirement vehicle that produces huge tax savings because all tax distributions are tax-free. That statement can a bit confusing, so lets break it down.
The downside of a Roth IRA is the fact that contributions are not tax deductible as with traditional IRAs or 401(k)s. The upside of a Roth IRA, however, is that all distributions are tax-free once the person reaches the age of 59?. So how can you use a Roth IRA to pass money to your child? Opening A Roth IRA For Your ChildOne of the biggest keys to retirement planning is "time". The more years you spend saving money for retirement, the more you should have when that blessed day arrives. Imagine if you had started...
Creating Estate Tax Savings For Your Child Using A Roth IRA
Ira > Creating Estate Tax Savings For Your Child Using A Roth IRA
Rolling your 401k: Contributory IRA vs. Rollover IRA
In an ideal world you would start your working career with a great company in your early 20s, steadily climb the corporate ladder, retire at age 65, and draw a sufficient income from your accumulated 401k account to live happily ever after.Unfortunately, that's not how the real world works. If you are like most people, you will change careers, or at least companies, several times. Each time, you'll be faced with the question of what to do with your accumulated 401k benefits.You will likely have a few choices: keep your 401k with your old employer (sometimes possible), roll the proceeds into your new employer's 401k plan, or put them directly into a self-directed IRA at a brokerage firm of your choice.Since leaving your 401k with your ex-employer has no benefits whatsoever and most employers will prefer you transfer out anyway, that leaves only the last two as viable options:1. Roll your 401k proceeds into the new employer's 401k plan of (if allowed)This is the most painless solution...
Rolling your 401k: Contributory IRA vs. Rollover IRA
Ira > Rolling your 401k: Contributory IRA vs. Rollover IRA
Early Distributions From Retirement Plans
An early distribution from an Individual Retirement Arrangement (IRA) or a qualified retirement plan need not be a "taxing" experience. Fortunately, there are exceptions to early distributions. Any payment that you receive from your IRA or qualified retirement plan before you reach age 59? is normally called an "early" or "premature" distribution. As such, these funds are subject to an additional 10 percent tax. But there are a number of exceptions to the age 59? rule that you should investigate if you make such a withdrawal.
Some of these exceptions apply only to IRAs, some only to qualified retirement plans, and some to both. IRS Publications 575, Pensions and Annuities, and 590, Individual Retirement Arrangements (IRAs), have details.In addition to the 10 percent tax on early distributions, you will add to your regular taxable income any distributions attributable to "elective deferrals" that you contributed from your pay, your employer's contribution and any income earned...
Early Distributions From Retirement Plans
Ira > Early Distributions From Retirement Plans
Don?t Let Uncle Sam Take 80% of Your IRA