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Don't Make Them Pay Taxes Too Quickly On Your Retirement Plan

Perhaps the best kept secret about qualified retirement plans, such as IRAs and 401(k)s, is the flexibility of their beneficiary designations.

Once an individual reaches age 70 1/2, he must begin withdrawing Required Minimum Distributions from his retirement plan. If he has not withdrawn all of the money from the retirement plan by the date of his death, the beneficiary designation form will determine not only who will receive the money. The beneficiary designation form will also determine how quickly the recipient will have to withdraw the money and thus how quickly the tax will be paid on the funds.

Depending on the circumstances, it may be possible to extend the period of time in which the beneficiary must withdraw Required Minimum Distributions by naming a much younger individual beneficiary. The effect of this decision is that the Required Minimum Distributions will be withdrawn at a much slower rate. Thus, taxes will become payable at a much slower rate. The net effect will likely be that the beneficiary receives a greater amount of money over the course of the distribution than had the beneficiary received the money in one lump sum upon the death of the owner of the retirement plan.

Every situation is unique. Excruciating attention to detail is required to arrive at the proper outcome. But with proper estate planning, an individual can help his beneficiaries take full advantage of his retirement plan.

Why IRAs are Fabulous!

Individual Retirement Arrangements (IRAs) are fabulous retirement strategies. But they are fabulous estate planning devices as well. This is the beginning of a series of blog posts regarding the benefits of having an IRA.

Perhaps the greatest benefit of having an IRA is the preferable tax treatment the IRA receives.

There are basically two types of IRAs: traditional and Roth. If it is a traditional IRA, then the money placed into the account is tax deferred. That means you don't pay taxes on such money until you take the money out. If you have a Roth IRA, you pay taxes on the money you place into the account, but the money grows "tax free"--you don't pay taxes when the money is taken out!

Because the stock market historically rises over time, when you allow your money to grow "tax deferred" or "tax free" in a traditional IRA or a Roth IRA for a substantial period of time, you are choosing a path that is quite likely to result in more money after Uncle Sam is "all said and done" with his slice of the pie.

This is primarily a retirement reason for investing with an IRA. But the estate planning strategies enter into the picture when you fill out your beneficiary designation form.

More on that in the next post.