Retirement assets are subject to a variety of taxesperhaps more so than any other asset. Consider:

–Distributions from a retirement account to the account owner during life are subject to federal and, in many cases, state income tax.

–If the account owner receives a distribution prior to age 59-1/2, then unless an exception applies, such distribution would be subject to an additional 10% penalty.

–Upon an account owners death, retirement assets are subject to estate tax to the extent such assets are not sheltered by the account owners estate tax exemption or do not qualify for the federal estate tax marital deduction.

–Upon an account owners death, retirement assets could be subject to the generation-skipping transfer (GST) tax, which is imposed at the top marginal estate tax rate (currently 55%, but scheduled to decrease gradually under EGTRRA).

–Amounts distributed to the account beneficiary after the account owners death are subject to federal and possibly state income tax, given the nature of such distributions as income in respect of a decedent (IRD), unless the IRA is a Roth IRA. However, a deduction is available to the recipient of an item of IRD, based upon the estate tax attributable to such item, which somewhat eases the estate tax burden associated with the asset.

The failure to consider retirement assets when clients intend to include a charity as a beneficiary of their estate plan could result in the payment of taxes that could have been avoided.


Reproduced from National Underwriter Life & Health/Financial Services Edition, December 10, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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