Retirement Plans

Recently, Congress changed the rules on retirement plans. Today, the payout rate requirement after age 70.5 is much lower than they used to be. Consequently, as people get into their 80s and 90s its more likely that their IRA, KEOGH, or 401k balances will remain higher. That is good news for most older Americans!

However there is a looming and often large tax on retirement plans that people often don’t consider while doing their estate planning. Here’s how it works:

Congress allows each of us to put money into a retirement account during our working years tax-free. In other words, we don’t have to pay income tax on the amount of money we place in IRAs, KEOGHs, or 401ks. Additionally, our retirement accounts get to compound in value tax-free as well in order that they can grow as quickly as possible to support us during our retirement years.

However, the IRS doesn’t forget that those very same retirement plans have never been subject to tax! So, if a person passes away while holding the retirement plan in their estate, income tax to your heirs AND possibly estate taxes will be due. 

To avoid this scenario, it’s often advisable for people simply to name their favorite charitable organization(s) as the remainder beneficiary of their retirement plan. This can be easily done by calling the retirement plan administrator and filling out a new beneficiary designation form. Charitable organizations are not subject to estate or income tax, so the full value of the retirement plan can become a gift.