Estate planning can become complicated, especially for high net-worth individuals. But, a question that often comes up during the estate planning process is whether one can create retirement assets. These are assets that are specifically designed to be passed down, and the art to their creation can be a key component of an effective estate plan.
Traditional IRAs
To be clear, traditional IRAs are treated like traditional assets. This is a common misconception, and it means that ordinary income tax rates apply. For example, if a $100,000 IRA passes from a parent to a child, the child’s income tax rate will apply when they withdraw that money. This means that a 37 percent tax rate that they pay on their other income would apply to the IRA dispersals.
Roth IRAs
How can one avoid their heirs paying this exorbitantly high-income tax on distributions? Convert the traditional IRA to a Roth IRA. This is because Roth IRA’s are funded with money that has already been taxed, so for the lifetime of that retirement plan owner (and that owner’s spouse), it grows tax-free and distributions are also tax free. Moreover, thanks to the SECURE Act, for certain heirs, for an additional 10 years after the death of the owner and their spouse, Roth IRA distributions can also be tax free.
Charity segregation
While this Roth IRA strategy can work for individual heirs, both Traditional and Roth IRAs can also be used for charities. Simply naming the charity as the beneficiary allows for their tax-free transfer to the beneficiary charity. Plus, this can also give the estate a deduction at the federal and state level for estate taxes.
For Jackson, Tennessee, residents reading this blog, the key takeaway is that there are many, many options for an effective estate plan. Though, the first call should be to an attorney to ensure that the estate plan meets the needs of the drafter and the family.