Estate Planning
Taxation Of Iras & Retirement Plans

TAXATION OF IRA’S AND RETIREMENT PLANS

Federal taxation of large IRA’s or retirement plans is borderline confiscatory. Not only are the distributions subject to income taxes at, say, 37% but the entire balance is subject to estate taxes at 40%, generally with no discount for the income tax liability inherent in the IRA. There is an income tax deduction to reflect the estate taxes paid, but the net effect is a combined marginal tax rate that can exceed 60%.

Fortunately, there are some sophisticated techniques which can be employed to significantly reduce that tax exposure. One involves distribution partial interests in an LLC using valuation discounts. Another involves offsetting annuity and life insurance contracts inside and outside the IRA. Insurance inside the plan can be distributed at a time when the transfer values are considered very low. If the IRA owner does not need the money, his or heirs can reap huge benefits in comparison to simply exposing the assets to income and estate taxes. While usually not as strong, the benefits can also be significant where the IRA owner must have access to the money.

These techniques are not cheap, but when funded through tax savings, the results can be quite remarkable indeed. Besides, not planning is the most expensive plan of all.