Did you know that if you die owning traditional retirement accounts, such as 401(k) plans and IRA’s that the income taxes owed on withdrawals still have to be paid by your heirs? Market Watch wrote in detail about this topic recently. The article centered on the “stretch” IRA. Currently, IRA beneficiaries can draw down the account slowly over their lifetime. However, there are talks about the “stretch” possibly being eliminated in the near future for all non-spouse beneficiaries. If this should occur, heirs may be forced to empty IRAs within five years of their loved one’s death. This is a problem because the extra income may push them into a much higher tax bracket. Elimination of the “stretch” is especially worrisome as Market Watch states retirement accounts are the second-largest asset that Americans approaching retirement age typically own. The first largest asset being their home. Market Watch provides some strategies to consider to address this issue should it occur:
- Tap into your taxable accounts first.
- Convert part of your traditional IRA account to a Roth IRA.
- Leave taxable-account money to charity
- Purchasing life insurance so your heirs have money to pay your IRA’s income-tax bill or to replace the income tax bite.
- Leave your IRA to a charitable remainder trust.
You can read more about each of these strategies in the Market Watch article: http://www.marketwatch.com/story/another-reason-to-worry-about-dying-taxes-2015-06-15
As with any planning, it is advisable to seek consultation from a knowledgeable professional who can help you become fully informed about all of your options.