What are the tax implications of passing down a retirement plan?

One of perhaps the biggest guffaws that individuals make when planning their estates is not thinking of the tax implications that making certain decisions will have on their beneficiaries. Certain types of retirement investment plans require beneficiaries to take regular payouts from them. This can adversely impact a beneficiary’s taxable income unless other provisions are put in place to prevent this from occurring.

People who have individual retirement accounts (IRAs) or 401(k)s are generally required to take required minimum distributions (RMDs) from them starting at age 70.5. Any beneficiaries who inherit these may be required to take RMDs as well. This gets counted by the Internal Revenue Service (IRS) as taxable income.

Having the RMDs tacked on to an heir’s income can be quite costly for them, especially if they receive such payouts while they’re at the peak of their earnings. Falling into a higher tax bracket ultimately leaves them with less wealth than they would have otherwise received.

One way that the originator of the retirement plan can minimize their heirs’ tax burden is by completing a Roth conversion. It may be possible for an heir to enjoy tax-free growth of the funds contained in the IRA if a Roth coversion happens while the originator is still alive.

Doing a Roth conversion is just one of many ways to ensure that their heir isn’t forced to be placed in a higher tax bracket and thus receives fewer proceeds from the estate in the end. An attorney in Middlesex can advise you of the many other alternatives that you may want to consider for leaving behind assets to your loved ones here in New Jersey or elsewhere in the country.