When I speak of IRA's, I am referring to any type of retirement account that has not been taxed. This is referred to as "qualified money."
What confuses most people is that we have at least five kinds of taxes. Most of you may only think of income taxes when we are discussing these accounts, and the rules are: by December of the year in which you turn 70 1/2, the IRS requires that you take a mandatory distribution based on a life expectancy factor each year from now on for the rest of your life. Many grumble about this because if you have accumulated a significant amount (even if you have multiple "qualified" accounts), your required mandatory distribution can be significant, and may even push you into a higher tax bracket. Hah, that was not the theory behind saving in these accounts in the first place. The idea was, in retirement you should be in a lower tax bracket so the distribution would not affect you as much. Many people find that with the combination of pensions, social security checks, investment income, and interest income coupled with the fact that you may no longer have deductions like mortgage interest, or dependents - your tax bracket has not gone down at all. Some even may see an increase.
Well, this is only one area of concern that most of you are well aware of. What is usually not stressed enough is the fact that many of these IRA accounts will not be spent down to zero, many even continue to grow even with required minimum distributions. What is left when you die is a totally taxable account in your name that will now also be subject to Federal Estate Taxes & New Jersey Inheritance Tax (may be different for your state. So you see, you have triple taxation.
Right now the Federal exemptions are $5 million for an individual and $10 million for a couple for the next two years only. No one thinks the exemptions will remain that high come 2013. So If you don't plan on dying now, you don't have to ignore this. NJ taxes can be 11-16%. Often times your heirs escape the Federal but get creamed by the state.
There are several strategies that can be implemented to offset this rape of your retirement accounts. It is imperative to do the proper planning to allow for the efficient transfer of these assets to your heirs. "Stretching," also known as "Multi-generational IRAs" may soften the blow of the income tax problem, but this strategy does not eliminate or reduce the estate tax, both federal and state, problem.
Reach out to us if you'd like to have an independent analysis of your IRA and find out what may be an appropriate strategy to pass on this money in your individual circumstances.
Please don't pay more tax because you failed to plan for the inevitable. You worked hard for that money!
"Lady Fi"
Kathy
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