Getting more out of your retirement assets
For years, you’ve been investing in an IRA or employer-sponsored retirement plan, and, thanks to the benefits of tax-deferred growth potential, you now have a considerable nest egg ¾ enough to enjoy a comfortable retirement, and pass a tidy sum on to children and grandchildren.
Or, so you think. Unfortunately, after taxes, only a small percentage of your retirement savings may be left.
The Tax Toll:
Your retirement assets alone may be enough to trigger federal estate tax at your death.
Every estate is entitled to an exemption that, in 2007and 2008 allows the first $2,000,000 of your assets to pass tax-free to anyone you choose.
However any estate assets in excess of this exclusion amount that you give to anyone other than your spouse can be hit with an estate tax of up to 45%. And, while an unlimited federal estate-tax marital deduction lets any amount of assets pass to your surviving spouse tax free, retirement assets you give to your surviving spouse may be taxed later in his or her estate. You haven’t avoided the estate tax; you’ve only postponed it.
In addition to estate taxes, your beneficiaries will have to pay federal income tax on any distributions of tax-deferred retirement assets they receive from your estate.
These amounts are taxed at ordinary income tax rates, which currently range from 10% to 35%. State income taxes, where applicable, would claim even more. If your retirement assets pass directly to your grandchildren, a 45% generation-skipping transfer tax may also apply ¾ in addition to any estate tax paid.
The bottom line is that, without financial planning, most of your retirement assets could end up going to the federal government. What can you do?
Give to Charity:
If you plan to leave gifts to charity when you die, consider using some or all of your retirement plan assets to make those gifts.
One simple and safe way to do so is to name a charity as the beneficiary of your IRA or retirement plan account. The value of the retirement assets will be included in your estate for estate-tax purposes. However, your estate can claim an estate-tax charitable deduction for the full fair market value of the assets the charity receives.
Naming a charity as beneficiary of your retirement plan also can eliminate any income-tax liability on the assets. While individuals who receive distributions of previously tax-deferred amounts from retirement plans must pay income tax on the distributions, many charities are tax-exempt and, thus, don’t have to pay income tax on distributions received from a donor’s retirement plan.
Alternatively, you can give retirement assets to charity now and receive the added benefit of watching your money at work. To make your gift, you withdraw assets from your retirement account and donate them to charity. Any previously tax-deferred amounts you withdraw will be included in your income for the year, but there is an available income tax charitable contribution deduction (within tax law limits) that will reduce or eliminate the income tax on the withdrawal.
The value of the assets, and of any future appreciation in those assets, is removed from your estate for estate- and generation-skipping transfer tax purposes.