Strategies to help protect retirement assets from taxes

As hard as it is to believe, 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 be extreme, it stresses that advanced preparation is important.

Saving your heirs thousands of tax dollars on your retirement money hinges mostly on decisions you make before you retire. 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 your tax or financial professional as to how this information could apply to your situation, since individual investor results will vary.

Lighten your heirs' tax burdens

For the tax conscious, the premise behind retirement plan distributions is simple -- the longer you are expected to live, the less the IRS requires you to withdraw (and pay taxes on) each year. The IRS rules greatly simplify the calculations of required minimum distributions. However you should consult your tax professional about how the rules may affect your situation. (Remember, too, that if you or your heirs do not withdraw minimum amounts when required, you 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, your assets could end up in probate and your beneficiaries could be taking distributions faster than they expected (which could also happen if your 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.

Know your 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 your goal is to take the least out of your IRA or qualified plan as possible, it is imperative that you and your heirs educate yourselves on the options available to enable you to reach your goals. Consult with your legal or tax professional to discuss the best way to structure your qualified retirement plan or IRA assets to take advantage of the new rules.

Talk to your family without delay

You should consult your legal and tax professionals 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 your tax burden lighter later on and bring peace of mind to your family. Likewise, talk to them about your wishes. With careful planning, your retirement assets can remain as vital as they had been during your lifetime. Consulting a financial professional can help ensure that your plans are consistent with your objectives.

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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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