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IRA and other retirement accounts offer some very valuable tax advantages. While they are beneficial, in terms of providing a vehicle for saving for your later years, they also lower your income taxes and they grow tax-free. There are some disadvantages, which should be considered.
One problem with IRA and other retirement accounts is that their value is part of your taxable estate. So if you have $1 million in non-retirement assets and $3 million in retirement accounts, you have a total of $4 million. If the total value of all your assets, including your home, savings accounts, life insurance, etc., exceeds the federal and/or state estate tax limit, your heirs will pay an estate tax. Moreover, when they start taking monies out of your retirement accounts, they will pay income tax on the withdrawals. While spouses can “roll-over” the IRAs, and only continue to take out the RMD (required minimum distribution), all other heirs must withdraw the monies over a course of years–usually limited to ten. If you are retired and not in a high income tax bracket, it may make financial sense to take out more than the RMD every year, and pay the income tax, rather than your heirs paying the tax, especially if they are in a higher bracket. Also, by you paying the income tax, you are reducing your taxable estate.
Another disadvantage of retirement accounts is that if part of your estate plan involves the creation of a credit shelter trust, the retirement accounts can not be payable to an estate or trust without serious adverse tax consequences. If payable to an estate or trust, the monies become immediately taxable, and at a higher rate. The same is true if you wish to leave these accounts in a trust for someone who is disabled. This is not an impossible situation, there are ways to avoid these adverse consequences, but it makes your estate plan more complicated.
There is no doubt that contributing to an IRA, 401K, or other retirement account offers very significant tax advantages, as contributing to them not only reduces your taxable income but the accounts grow tax free until you make withdrawals. One just needs to keep in mind, as they get older, that there are some disadvantages and it may make sense to draw down on them at a more rapid pace. Of course, before doing so, you should consult with your tax accountant and financial planner.
IRS Circular 230 disclosure: We inform you that any tax advice contained in this communication is not intended or written to be used, and may not be used by your or anyone else for the purpose of avoiding penalties imposed under the Internal Revenue Code.
At the Law Office of Angela Siegel, we are pleased to offer legal assistance to clients in Nassau and Suffolk Counties, including Garden City, Jericho, East Meadow, Mineola, Syosset, Roslyn, Cedarhurst, Melville, Huntington, Smithtown, Plainview, Merrick, Wantagh, Rockville Centre, West Hempstead, Little Neck, Douglaston, and Bayside. We also serve clients in the boroughs of Manhattan, Queens, and Brooklyn, as well as those located in the state of Florida.