Have You Named the IRS as Your IRA Beneficiary
Uncle Sam wants you and he really wants your IRA -also known as Internal Revenue Account if you have not taken steps to protect it upon your death. You have saved your whole life for your retirement account. Why? For retirement. Okay, so you are now retired. You either need your IRA for income or you don’t. If you are one of the growing number of retirees that will never need to live off income from the IRA or other qualified accounts you may have, consider these potential strategies.
IRA’s enjoy tax deferred status. This means no taxes are due until withdrawel. You may have gotten a tax deduction to encourage you to place funds in it to begin with. IRA’s can be rolled over, disclaimed, or cashed in depending on the rules in force at the time of an individuals death.
If your non-spouse heirs cash in that IRA, they will pay taxes at their own tax rate on the amount inherited. So on an IRA worth $100,000, your heirs may lose as much as $35,000 to Uncle Sam. If your estate is large enough, they may lose additional amounts as high as 45% to estate taxes. WOW-that could be 70%-80% of the account! Yes it could! So how do you pass on an IRA?
Here are a few options.
1. One way is to use your RMD’s to purchase an insurance policy that will pay 100% of the taxes due and the IRA could be rolled over to a ROTH IRA for your spouse, or your heirs could take a lump sum payout.
2. Use a reverse mortgage to pay the premiums on a life insurance policy that will cover the taxes so the IRA can be cashed in by your heirs and reinvested.
3. Cash in your IRA now and pay for a single premium life policy with the after tax proceeds. This may be able to double the value of the IRA at your death but it is not the best way to maintain maximum flexibility.
4. Roll over your IRA to a fixed or a fixed index annuity with a company that provides a restricted payout form. No taxes will be due on this as the IRA will remain an IRA after the transfer. Upon your death, your heirs will be able to stretch out the distributions over their own life expectancies. This could generate substantial total returns to your heirs. Some call it a Multi-generational IRA.
5. Rollover your IRA to an IRA Single premium immediate anuity with a 7 year payout. Use your after tax IRA distributions to buy a life insurance policy payable to your heirs. This could be huge. If done correctly, you can avoid all estate taxes and income taxes when inherited.- I love this one!!!
6. Cash in IRA, pay tax, reinvest in other assets and use this account as collateral for a loan to pay the life insurance premiums. This is known as premium financing.
7. Roll out as much of your IRA as possible annually so as to avoid the income tax bracket creep, and convert to a Roth IRA. TAxes are paid at your tax rate. You may be in a much lower bracket than your children will be if they inherited all that money in one year and did not take advantage of the stretch concept currently allowed by the government.
Not intended as legal, tax, or accounting advice. Please contact your own professional with regard to this information as it applies to your specific situation.
Tags: 401k, 401K rollover, 403B, ira rollover, IRA rules, IRA strategies, IRA taxation, Thrift savings