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Who Does Your IRA Savings Belong To?
Although we call him Uncle Sam, do you want him to be
the beneficiary of your IRA? The IRS rules that govern
required minimum distributions define when you must
begin taking distributions, from what accounts you must
take them, and a formula for calculating the amount of
your distributions. However, you can either accelerate
your required minimum distributions or stretch them out,
depending on: Whether you include a beneficiary in your
life expectancy calculation; how old your beneficiary
is; how you choose to recalculate your life expectancy
after your first distribution. Your choice of
beneficiaries and a recalculation method are also
important because they can determine how quickly the
assets that remain in your retirement account must be
withdrawn by your beneficiary or beneficiaries after you
are gone. Let us show you the multi-generational IRA,
where you can stretch your savings all the way to your
grandchildren and beyond.
Most investors are aware of the benefits an
annuity or an IRA can provide. Earnings and deductible contributions
accumulate tax-deferred and are not taxed until distributed. What happens if the owner dies before earnings are
withdrawn? Unfortunately, the income tax liability is
passed on to the beneficiary. Most investors are not aware that a special income tax deduction can be
used to partially offset this tax liability.
This income, which accrued before death that is now taxable to
the beneficiary, is called Income in Respect of a Decedent (IRD). The IRD is included in the decedent's gross estate resulting in
a double tax on the estate and the amount the beneficiary
withdraws as income. However, a deduction may be available
to alleviate taxes.
A Case Study
A mother,
Joan, dies leaving a $500,000 IRA composed
entirely of deductible contributions and earnings to her son,
Jason. Her total taxable estate is $4,000,000. The $500,000 IRA
is included in her taxable estate and is, therefore, subject to
estate tax. The IRA payments Jason receives are
considered taxable income. In essence, he bears the burden
of two taxes on this income - the estate tax (which reduces his
inheritance) followed by income tax.
In order to provide some tax relief, Jason is allowed to
take an income tax deduction for the estate tax attributable to
the IRD. It is a miscellaneous itemized deduction, but it
is not subject to the 2% floor.
In this case study, the $500,000 IRA is
subject to a 48% estate tax rate upon Joan's death. Therefore, the estate tax
assessed on the IRA is $240,000. Note that the IRS gives
Jason the favorable presumption that the IRA is estate-taxed
at Joan's margin.
To offset these estate taxes, Jason will receive a $240,000
income tax deduction. He can use the deduction as distributions from the IRA. Jason's net income tax on the IRA distribution may not be
as high as you would think.
Keep in mind that this deduction is only available if the
decedent had to pay estate tax on the IRA account. If the
IRA account passed to a spouse, and is free of estate tax because
of a marital deduction, there is no income tax deduction
available. If there is no estate tax because the
estate is less than $1,500,000 there is no IRD deduction.
This is one of many areas where we can provide a value-added
service to our clients and beneficiaries who have IRAs, qualified
plans and/or annuities. There is no place on the IRS
forms to guide you through the IRD calculation. Without the
guidance of a Certified Estate Planner (CEP), you are likely to miss
this important tax opportunity. We educate our
clients on what IRD is and encourage them to speak to our
accountants and attorneys to help calculate the deduction.
Please click
INFORMATION REQUEST
to receive more information about Stretch IRAs.
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