SHow #354 Airing Sunday. 8/27/06
When you leave an IRA to heirs, are you leaving them a load of taxes too? By following our expert’s tips, your heirs won’t be IR-ATE over taxes. Here with helpful tax-saving tips on IRAs is a man who raises our IRA knowledge level, not our ire, Tony Mercuri from Ta-Check Tax Service.
Question: How can we minimize the tax consequences on our IRA beneficiaries?
Answer: The best way to save tax money for your heirs is to stretch the IRA. The stretch IRA is a process, not a product. It allows your beneficiary to stretch out distributions from your IRA over their lifetime. By doing this, they are not forced to take a lump sum distribution and pay taxes on it. They can now take the money out slowly.
Question: Can all IRAs be stretched?
Answer: Some custodians (the company holding the investments) do not allow stretch IRAs, so you need to make sure that the custodian will allow stretch payments. (How do you make sure? Ask the custodian.)
Make sure you have named beneficiaries on your IRAs—not just a primary beneficiary, but also a contingent one. (Because the money gets paid to your estate as opposed to a beneficiary, this will not work.)
Make sure no monies are in 401(k) plans. Get the money into an IRA, because lots companies don’t allow stretch 401(k)s
Question: How else can we minimize taxes on IRA accounts?
Answer: You need to maximize your tax bracket. Many retirees are in lower tax brackets then their children. If that is the case maximize. I just met with someone who was able to take $10,000 out of the IRA and only pay $300, or 3%, in taxes, and it is difficult to pay less then 3% in taxes.
This strategy may require you to pay some tax, but that is better then your heirs paying 20% in tax. Plus, you do not have to take all the money out at once. You can slowly do it each year to maximize the lower brackets.
Question: Any other thoughts?
Answer: As with anything you do, know all the rules. For instance, if you are a spouse, do not automatically convert it into your own IRA. It may be beneficial for you to keep it as a beneficiary IRA as opposed to converting it into your own.
An example of when this would be a good idea is if you are under 59 ˝. If you convert it into your own IRA at this age, you cannot access it prior to 59 ˝ without a 10% penalty. But if you kept it a beneficiary IRA, you can access it without penalty no matter how old you are.
If you do have a 401(k) plan with highly appreciated company stock, consider taking the company stock under the NUA (Net Unrealized Appreciation) rules. This would allow you to pay capital gains tax as opposed to income tax, which is very beneficial as capital gains tax rates are much lower then income tax rates
You don't have to make your heirs IR-ATE over paying big taxes on your IRA, if you follow Tony's tax-savings tips. For more information, give Ta-Check a call.
