IRA Year-Round Planning

The previous blog gave year-end tax planning for IRAs. Here are some considerations for any time of the year.

  • If you plan on making charitable bequests, you should consider leaving some of your IRA or retirement funds to the charities. This way, those funds would escape all income and estate taxes. IRA funds left to individuals are subject to required minimum distribution rules and will be subject to income tax when distributed; and the IRA and other retirement accounts are also subject to estate tax depending upon the size of the overall estate.
  • An estate tax-planning strategy with a large IRA is to convert it to a Roth IRA and pay the income taxes. This will remove the income tax payments from your assets so your taxable estate would be that much lower. Also, future earnings on those funds would not end up in your estate, future earnings on the Roth IRA would never be subject to taxation and you would not have to follow the RMD rules.
  • IRA and other retirement plan distributions pass outside of your probated estate but will still be included in your total estate assets to determine whether those accounts are subject to estate tax. Further, your will determines who pays the estate tax (if applicable) on amounts passing outside of your estate. Check with your attorney or estate planner about this.
  • IRA and retirement plan beneficiary designations are similar to a substitute will for those funds. When you have estate planning done make sure your adviser asks about these forms and the amounts in your retirement accounts; and if they don’t I would question whether they are truly competent estate planners.
  • Now is a good time to review your beneficiary designations and update them if necessary. If you have grandchildren and named your children as beneficiaries, consider adding “per stirpes” after each child’s name. This way, if unfortunately a child predeceases you, their shares would go to their children and not their siblings.
  • I posted a warning to IRA beneficiaries on July 24, 2012 and that should be relooked at when they inherit IRA accounts.
  • Now is a good time to review your asset allocation and how you invested the funds in your IRA and other retirement accounts. People with tax free bonds and stocks should consider reallocating the bonds to taxable bonds in the IRA and own the stocks in their individual name. Likewise, if you are trading stocks or options and receive substantial short term gains, you should consider doing this in your tax sheltered IRA. Check out my Asset Location blog posted on October 4, 2012.

IRAs are one of the most widely owned accounts but the rules are not so simple. The above is a start to becoming more empowered with handling this in the best manner possible.

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