The Evolution of IRA’s: Why Designating the Right Beneficiary is Only the Beginning


In a recent blog, “The Importance of IRA Distribution Planning,” extensive analysis was provided as to the importance of naming a trust as an IRA beneficiary rather than any one individual, especially a minor child.  A common misconception is that when assets are transferred to an IRA and the proper beneficiary is designated, the planning is complete.  To the contrary, this is only the beginning.

After creating a trust that will be designated as the beneficiary, the next step is to determine how to maximize what that beneficiary receives.

In 2012, an individual under 50 years of age can contribute up to $5,000 to their IRA or, the amount of total taxable income they earned, whichever is less.  If participant in a 401k plan can contribute an extra $5,000 a year to the 401k plan once the individual is over 55.  After funding your IRA or 401k plan, the next step is to determine how to invest the assets in the IRA or 401k plan.  An IRA or 401k plan is a tax deferral device.  Assets placed in the IRA or 401k plan are not taxed unless distributions are taken.  Therefore, assets with favorable tax characteristics should be held in non-retirement accounts, whereas assets which may produce ordinary income or great future appreciation or which are traded frequently are more favorable to be held in an IRA.

After determining how to fund the IRA, the next decision is how to maximize the end result of this IRA, i.e. maximizing the rate of return of those assets held in the IRA.  Estate and asset planning is an evolving and ever-changing process.  Many focus on the tax deferral characteristics of IRA’s, but people also forget that those assets are eventually taxed upon withdrawal.  Recent articles have hinted that strategies may be changing with regard to IRA planning.  Rather than focus on tax deferral, some are beginning to utilized tax-now transfers and take advantage of low tax rates.  For example, if you own a traditional IRA, you can affect a 100% transfer of those assets to a Roth IRA.  That transfer triggers an immediate income tax on those assets .  However, those assets now can grow tax free and upon your death, the beneficiary will not be responsible on any further tax on the growth of those assets.  Further, if the tax rates continue to grow, this acts as a way to “lock-in” the tax rate now, at your current income tax rate, and not whatever future rate it may climb to.  Planning is an evolving process and is never complete.   It is critical to consult with lawyers and tax advisors who are well versed in IRA planning because, while current tax deferral may be attractive to you on its face, an estate planning professional may find that choosing tax-now options will ultimately benefit you and your heirs immensely in the future.

–  Gary Altman, Esq. and Adam Abramowitz, Esq.

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