Most people are somewhat familiar with the basics of an Individual Retirement Account (“IRA” for short). Essentially, you can save for retirement by putting money into the IRA. With a traditional IRA, you do not pay taxes on the money when it is deposited into the account, nor as it remains in the account accruing interest; however, you do pay taxes on the money when you withdraw it. With a Roth IRA, you pay the taxes at the outset, but future withdrawals will all be tax-free (subject to certain requirements).
IRAs and Taxes
Unfortunately, many people never stop to consider how to protect the IRA in the event that they pass away and leave it to an heir. This can be an extremely expensive mistake, primarily because of the timing of when money must be withdrawn from the IRA.
You probably know that you have to wait until age 59 ½ to begin making withdrawals from your IRA if your so desire. You can delay paying taxes until you are retired, and most likely in a lower income tax bracket. However, this is not the case with an inherited IRA. When someone inherits an IRA, he or she is required to begin making withdrawals immediately, regardless of whether he or she has hit age 59 ½.
The heir will be required to pay taxes at his or her current tax rate. Since this usually takes place during the heir’s peak earnings years/higher tax bracket, this can mean thousands and thousands of dollars that are lost to taxes, simply due to a lack of foresight and planning.
Planning to Protect Your IRA
Fortunately, there are things that you can do to minimize the amount of money that goes to taxes. Here at AlerStallings, we work with our clients to plan ahead and protect their IRAs as much as possible. Through the use of sophisticated estate planning tools, we are able to help ensure if you pass away before your IRA funds are depleted, your heirs will pay as little in taxes as possible.
We are here to help make sure your hard-earned money goes to the people you care about, and not to the government. Contact us today for a consultation, and let’s get started putting together an estate protection plan.