Strategies to help protect retirement assets from taxes

Today's tax-advantaged plans – including individual retirement accounts (IRAs), 401(k)s, and rollover IRAs – may be capable of meeting retirement goals. (A 401(k) contribution of $433 per month, at a hypothetical rate of 8% compounded monthly, would be worth more than $1 million after 35 years.)*

These plans are also highly vulnerable to tax losses, if they are not bequeathed properly. For instance, a $1 million IRA inheritance could be whittled to almost nothing under a combination of estate taxes, income taxes at the highest rates, and missed withdrawal deadlines. Even though this particular example may seem extreme, it stresses that advanced preparation is important.

Saving heirs thousands of tax dollars on retirement money they will inherit hinges mostly on decisions made before the investor retires. Therefore, it's important to take a look now at how to save heirs tax headaches later on.

*When distributed, ordinary income taxes would apply. This example is hypothetical and is not meant to be tax advice and does not represent the performance of a specific investment. Please contact a tax or financial professional as to how this information could apply to your situation, since individual investor results will vary.

Lighten the tax burden on heirs

For the tax-conscious, the premise behind retirement plan distributions is simple – the longer someone is expected to live, the less the IRS requires them to withdraw (and pay taxes on) each year. The IRS rules greatly simplify the calculations of required minimum distributions. However, consult a tax advisor about how the rules may affect your situation. (Remember, too, that if investors and their heirs do not withdraw minimum amounts when required, the investor may have to pay a 50% excise tax for that year on the amount not distributed as required.)

Select a beneficiary

If no one is named, assets could end up in probate and beneficiaries could be taking distributions faster than they expected (which could also happen if an estate becomes the beneficiary). In many cases, spousal beneficiaries are ideal because they have several advantages over other beneficiaries, including the marital deduction for the federal estate tax.

Knowing the options

The minimum distributions regulations have significantly simplified the calculation of lifetime distributions as well as expanded the options available to beneficiaries after the participant's death.** If the goal is to take the least out of an IRA or qualified plan as possible, it is imperative that investors and their heirs educate themselves on the options available to enable them to reach their goals. Consult with a legal or tax advisor to discuss the best way to structure a qualified retirement plan or IRA assets to take advantage of the new rules.

** IRS regulations TD 8987

Talk to your family without delay

You must consult legal and tax advisors before making any decisions concerning estate planning. It's equally important to talk with those who may bequeath a retirement legacy to you – such as parents or grandparents – to see what type of tax planning they've put in place. Opening the doors to this discussion could make tax burdens lighter later on and bring peace of mind to your family. Likewise, talk to them about your wishes.

With careful planning, retirement assets can remain as vital as they had been during your lifetime. Consulting a financial professional can help ensure that plans are consistent with objectives.

Important Note: 

Equitable believes that education is a key step toward addressing your financial goals, and this discussion serves simply as an informational and educational resource.  It does not constitute investment advice, nor does it make a direct or indirect recommendation of any particular product or of the appropriateness of any particular investment-related option.  your unique needs, goals and circumstances require the individualized attention of your financial professional.
This article is provided for your informational purposes only.
Please be advised that this material is not intended as legal or tax advice.  Accordingly, any tax information provided in this material is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.  The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent advisor.
Equitable Financial Life Insurance Company (New York, NY) issues life insurance and annuity products.  Securities offered through Equitable Advisors, LLC, member FINRA, SIPC (Equitable Financial Advisors in MI & TN).  Equitable Financial Life Insurance Company and Equitable Advisors are affiliated and do not provide tax or legal advice.

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GE-114824 (06/2017)