Many clients wish to gain a specified sum or a goal such as $1,000,000 or $2,000,000 during their lifetime. The pursuit of this goal is merely an artificial number based on some theory that they wish to be a millionaire or multimillionaire. One of the best ways to create significant wealth is through the deferral of income in a 401K or individual retirement account (IRA).
Once the account reaches a significantly high number, it is probable that the required minimum distribution, which you have to take on an annual basis, will probably be smaller than the annual increase in the account on an annual basis. Therefore, for many years, the retirement account will continue to grow even though you’re making a withdrawal.
It must be noted that in most cases, the deferral as well as the initial contribution of the IRA is nothing more than a deferral of the tax, not an elimination of the tax. This is wonderful while you’re is alive, but upon death, this could create a significant tax due to your beneficiaries.
If your estate is greater than $2,000,000 in 2007 or 2008, or if the amounts of your IRA together with all other assets are greater than $2,000,000, there will be an estate tax due. This amount will be in addition to income taxes due upon the withdrawal of the funds by the beneficiary recipient. Also, between estate tax, which will be approximately fifty percent (50%) for state and federal taxes in many jurisdictions, and income taxes, which could be at a rate of forty percent (40%) for state and federal taxes, there are only cents left on the dollar for the recipient.
Although there are strategies where the recipient may in fact withdraw money over time, oftentimes he must withdraw funds from your IRA in order to pay the estate tax. This withdrawal is also taxable income, so there is double taxation on these assets. Therefore, it may be advisable for the owner to withdraw funds even larger than the annual required minimum distribution.
In some cases, you should consider spending IRA funds first and using other money as a backup. Although many financial planners and other investment strategists will attempt to convince you that you should defer income by not spending the money from the IRA, if the calculations are done, it may be more beneficial to consider deferring income until it is time to spend it, and in retirement years, withdrawing funds from the retirement account before spending other assets.
By: Hyman G. Darling, Esquire
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