Retirement Income – Estate Planning Strategies Protect Retirement Plan, 401k
By Bill Griffith, Jr., CFP®
In Chapter 9 of my book, Securing a Retirement Income for
Life: Strategies for Managing, Protecting and Preserving Your Wealth
(Griffith, 2006, ISBN 0-9785506-0-9), I discuss the issue of planning
your estate to protect against the risk of unnecessary taxation and
other transfer expenses.
One of the least understood income tax/estate planning problems concerns a critical issue involving IRA and pension plan account balances. The issue revolves around the topic of Income in Respect of Decedent (IRD). IRD includes any income an individual is entitled to but does not receive over his/her lifetime. The best examples of IRD income are qualified plans, such as a profit-sharing or pension plan, 401k plan, rollover IRA and other such plans, annuities, accounts receivable and installment loans.
Here is the first problem: Say you have $1 million in a qualified retirement plan and you are subject to the maximum income tax and estate tax rates. Every dollar you take out is subject to income tax. Unless you spend it, the balance (after income tax) is subject to estate tax. In the highest 2009 brackets (35 percent income tax and 45 percent estate tax), your family gets only 35.1 percent - $357,500 – out of that $1 million.*
As you may know, the highest tax brackets are scheduled to be 40 percent (income tax) and 55 percent (estate tax) in the year 2011. At that time, the amount your family will receive is significantly reduced to only $270,000.
Now, here is the second problem: Your heirs will, in effect, pay the same amount that you would have paid had you withdrawn the funds during your life. In other words, IRD property will not pass to your heirs without someone paying taxes on the income. This “double tax” at death is called Income in Respect of Decedent (IRD).
If you have not done so already, it is imperative that you consider the impact this could have on your family members and on your finances. However, figuring out how to deal with this double tax on IRD assets can be perplexing. Fortunately, several estate planning strategies can be implemented to solve this problem.
Since the tax burden imposed on IRD property is high, we urge you to schedule a consultation with us regarding this very important matter. Find out how to preserve your retirement income for your family.
Our office is located near Pittsburgh, Pennsylvania on
Washington Road (Rt. 19) in South Strabane Township. We would
look forward to meeting you!
W.E. Griffith & Associates, LLC
1150 Washington Road, Suite 200
Washington, PA 15301
Phone 724-228-3440
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