“This savings engine can ‘run out of gas’ after death.” Everyone loves the revved-up accumulation potential of employer-sponsored plans and IRAs. The savings can really add up when income taxes are deferred until you begin withdrawals. Of course, for every upside, there’s a downside. Without careful planning, as little as just 20 percent of these assets can transfer to your heirs. First, if your tax-deferred savings are included in your estate, estate taxes are due on them. Then, once these assets are distributed, your heirs may need to pay federal and state income taxes on them. Ouch! Here are three options for handling money held in a tax-deferred plan to help lessen the tax bite later on:

• Take more than your minimum distribution each year and spend it, gift it or reinvest it.
• Convert some tax-deferred savings to an income annuity, and use income for your personal expenses or for gifting.
• Use a “stretching” strategy. In most cases, spouses name each other as beneficiaries of IRAs or employee-sponsored plans. However, at the first death, a surviving spouse has the right to ‘disclaim’ the inheritance in favor of a contingent beneficiary. For example, if your contingent beneficiary is your child, and your spouse disclaims, your child inherits the asset. The child’s life expectancy then becomes the measure for the required minimum distribution. This will produce a much lower annual payout and help stretch the plan’s long-term payout potential.

You may need financial advice on this strategy. Contact Us when you are Ready to Talk.