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Caring For Generations

Giving Less to the IRS

On Behalf of | Apr 1, 2016 | Uncategorized

Most people tend to delay taxes as long as possible, but this can backfire when it comes to IRAs, Eileen Ambrose, writing in the AARP Bulletin, points out. For retirees in their 60s, Required Minimum Distributions haven’t yet kicked in, plus the disbursements are likely to be taxed at a lower rate because the recipient isn’t working. The advice: take out just enough money each year from your tax-deferred accounts to stay in your tax bracket.  You’ll pay income tax on the money, but future Required Minimum Distributions (beginning at age 70 ½) will be lower.

The other tactic might be converting part of your traditional IRA each year to a Roth IRA, suggests IRA expert Ed Slott. You’ll owe income taxes on the amount converted, but it will probably be at a fairly low rate if you’re retired.  The Roth has no RMDs, and money in the Roth can continue growing, with any future withdrawals tax free to you and your heirs.

Roth IRAs can be very effective as an estate planning tool, emphasizes. “Seniors who convert a regular IRA into a Roth account can reduce their estate taxes and eliminate the income tax their heirs would otherwise have to pay on withdrawals take from an inherited regular IRA.”

In fact, by paying the conversion tax bill (the tax on traditional IRA assets that are moved into a Roth are due the year of the conversion), you are effectively prepaying income tax for your heirs The beauty of the conversion move, marketwatch points out, is that is has three benefits:

  • You pay no gift tax on this indirect “gift” you’ve made to your heirs
  • You’re not using up any of your unified federal gift and estate tax exemption ($5.45 million for 2016)
  • The income tax prepayment you make as part of the conversion reduces your taxable estate

Handled with skill, marketwatch adds, the Roth IRA can be the gift that keeps on giving. How?  While the heirs will need to take mandatory annual withdrawals out of the Roth accounts they’ve inherited from you, they can string out the withdrawals over their life expectancies, continuing to earn tax-free income on the remaining balances!

As Indiana attorneys, we’re always aware that different fields of the law overlap ours. Tax law and estate planning are similar in that they share ever-changing rules of a highly personal nature. And just as tax attorneys must take into account their clients’ estate planning goals, we at Geyer law have to consider the tax ramifications of our clients’ estate plans.

You might say the goal at Rebecca W. Geyer & Associates is giving “more and less” –  more to heirs, less to the IRS!