(from “Death and Taxes, The Sequel”)
Most people do not need to worry about federal estate taxes. However, retirees should be concerned with taxes imposed on their retirement accounts. Stretch IRAs, which allow beneficiaries to gradually draw funds out of retirement accounts, may become a thing of the past. Instead, beneficiaries may eventually be required to empty accounts within a limited timespan, creating significantly higher income during that timespan, and accordingly, a higher income tax. If this occurs, bequeathing ordinary taxable investments could be advantageous; the tax basis of the account is increased to “current value” at the owner’s time of death, allowing beneficiaries to avoid capital gains taxes. In this case, it may be beneficial for retirees to use their own IRAs and leave the taxable accounts for family. Retirees can also try converting IRAs to Roth IRAs; while the initial tax on the conversion is often high, beneficiaries can use the IRA gradually and tax-free. It is also possible to put IRA accounts in a charitable remainder trust, which confers some of the same benefits a Stretch IRA would. With the future of the stretch IRA in jeopardy, retirees should work with their attorney and financial advisor to create a tax friendly game plan for their assets.
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