submitted By Richard P. Wilson, Esquire
Since many people today have a 401 plan or an IRA, it is important to know what the tax consequences are when money is withdrawn from the retirement account.
The withdrawn amount is treated as ordinary income and taxed as such. When the account owner reaches age 72, there is a required minimum distribution that must be taken each year based on life expectancy.
When the owner of the account dies, any remaining balance is transferred to the beneficiary named in the contract.
Until January 1st, 2020, the beneficiary of the account was permitted to withdraw money based on their age.
In other words, they were allowed to stretch the withdrawals for the remainder of their lives, similar to the owner of the IRA.
There is a limitation on them now. The total account balance must be taken out within 10 years.
So, the IRA income is added to whatever income they earn from employment, it most likely will put them in a higher tax bracket.
The IRA owner must take that into consideration now when he is planning his estate to minimize the tax consequences.
One option is to purchase life insurance and place it into an irrevocable trust, which would pass to the beneficiary of the IRA account with no tax consequences to the owner or beneficiary.
This would offset the increased income tax caused by the 10-year limitation. Another possible tax increase is looming as well.
Currently, unless you have more than 23 million dollars in your estate, there is no need to do estate tax planning.
The exempt amount had been one million dollars for many years but was raised to five million dollars per person in 2010.
Considering that the US is facing trillions in deficits because of COVID- 19 and decreasing tax revenue, both nationally as well as state and local, something has to give.
The law which allowed the exempt amount to rise to 11.58 million per person expires at the end of 2024.
With this new reality it seems likely that the larger exempt amount will disappear and, in fact, if there is a change in the administration in Washington, new legislation would be passed causing the tax-exempt amount to be reduced.
If you have a larger estate, you might want to do estate planning now and take advantage of the existing law.
The federal estate tax top rate is 40%.
Avoiding it is a must.