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How do I minimize the taxes my beneficiaries will pay on my IRA or 401K?

By October 11, 2021March 20th, 2024No Comments

Although your children or grandchildren will certainly mourn your loss, they will be happy to inherit your IRA or 401K.What you may not realize is that the rules have changed when it comes to inherited IRAs and there might be a better way for you to leave these assets behind.

The Secure Act eliminated the stretch IRA, so now (except in a few rare circumstances) beneficiaries are required to remove all money from the inherited account within 10 years of the date of the inheritance. This means the most tax efficient way to withdraw from an inherited IRA would be to take 1/10 of the total balance out each year, perhaps significantly increasing the tax bracket of your loved ones over the 10-year period.

Fortunately, there are multiple solutions to this problem!

Roth Conversion – You can elect to pay the tax on your IRA or 401K now and convert the account to a Roth IRA. There is no income limit, or limit to the amount that you can convert, and you will be able to take advantage of lower tax brackets prior to the scheduled tax increase in 2026. It is important to plan for your Roth conversion to take place over several years so you can pay the least amount of tax possible. When your loved ones inherit a Roth IRA, no tax needs to be paid to the government and they get the added benefit of an additional 10 years of tax-free growth!

Life Insurance – A Life Insurance death benefit (if planned properly) passes to your loved ones tax free. You can fund a paid-up life insurance policy with IRA distributions or other sources of income that you are not using. This policy will pay a tax-free death benefit that your loved ones can then use to help pay the tax on the inherited IRA leaving them with more of the money you wanted them to have.

If you’re interested in scheduling a complimentary phone, zoom or in-person meeting with one of our financial advisors to discuss this in further detail – click here!