With fall fast approaching, it’s time to take care of a few things before year end that can also set you up for the start of next year.
Retirement contributions and withdrawals – Just as it’s important to make the necessary contributions to your retirement plan based on your financial plan, you must also take your required minimum distribution (RMD) by December 31 to avoid any penalties if above age 72 or own an inherited IRA. The Merriman Client Services team is hard at work making sure these are all completed for clients. Contributions: The deadline for 2021 Roth IRA and Traditional IRA contributions is April 15, 2022.
Estate planning is near the top of the list of things we know we need to do but often put off. We dread thinking about the end of our lives. Regardless of how unpleasant it is, the end could come at any time, without warning. Therefore, it’s important to have all basic estate planning documents in place, like a will, medical directive and durable power of attorney. These basics are necessary, but it’s extremely helpful to your loved ones if you take it a step further and give them specific instructions that aren’t contained in your legal documents. (more…)
Generally speaking, investors have separate retirement and non-retirement accounts. In most cases, the retirement accounts are split between Traditional IRAs (i.e., Rollover, SEP, Simple, 401(k), 403(b), 457, etc.), which are pre-tax dollars, and Roth IRAs, which are after-tax dollars. Non-retirement accounts include trusts, individual accounts and joint accounts.
Upon the owner passing, non-retirement accounts usually receive a step-up in their cost basis, meaning long-term capital gains are wiped out for that person’s heirs. In most circumstances, heirs could rebalance or cash out the portfolio and owe little or no capital gains taxes.
Roth IRAs maintain their tax-free growth and withdrawal nature, but do require annual required minimum distributions (RMDs). Pre-tax IRAs, however, behave differently. While they will maintain their tax-deferred growth advantage, their annual RMDs are 100% taxable as ordinary income. If the beneficiary is in the 25% marginal tax bracket, for example, then a $20,000 Traditional (Beneficiary) IRA distribution will owe $5,000 in federal income taxes. Often these distributions push the beneficiary into a higher tax bracket.
Since non-retirement accounts and Roth IRAs are more tax-friendly for heirs, it may be worth considering the possibility of naming a nonprofit organization, like an alma mater or favorite charity, as the beneficiary of Traditional IRA assets. Instead of heirs paying ordinary income taxes on future distributions, the nonprofit organization will be able to utilize 100% of the assets for their organization’s purposes because they are tax-exempt and won’t owe any taxes on distributions. This is especially attractive for those who are charitably inclined and are trying to determine which asset is best. Other benefits include that your estate will be reduced by the amount of the bequest (possibly reducing or removing any estate taxes owed), and your heirs will receive the most tax-friendly assets.
Each client’s circumstances are different, so we recommend you discuss this with an advisor to see if it makes sense for you and your family.
Stretch IRAs are useful tools for the individual who wants to extend the life of their retirement accounts through multiple generations. Although there is often confusion surrounding stretch IRAs and how they work, the concept is straightforward. A stretch IRA is a strategy, not a product, used to “stretch” the life of Roth IRA and Traditional IRA assets by designating beneficiaries with the longest life expectancy, such as grandchildren or even great grandchildren. By selecting beneficiaries two to three generations younger than the account owner, as opposed to designating children, the IRS will have lower imposed required minimum distributions (RMDs) for the inherited IRA, leaving a greater asset base to grow and cover future distributions.
To calculate the RMD for an inherited IRA (Table 1 – IRS Single Life Expectancy Table), divide the previous year-end account balance by the divisor (beneficiary’s life expectancy) corresponding to their respective age in the year following the death. This divisor is the IRS’s actuarial-based remaining life expectancy for the beneficiary, so each year, the divisor will decrease by 1, causing an increase in the percent of the account balance taken for the RMD.
The IRS provides a list of distribution options available to inherited IRA owners. Distribution options vary depending on whether the beneficiary was a spouse or non-spouse, and also whether the IRA owner passed away before their required beginning date (RBD), which is April 1 after they turn 70½. (more…)
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