Press Release Summary = Are you planning on leaving any dollars in your pension, 401(k) or IRA to children or grandchildren? Would you be surprised to know that the vast majority of these funds will end up with state and federal tax agencies and not your family? Did you think that - after paying taxes for a lifetime of work - your "tax qualified" plan would be taxed at rates from between 70-90%? Most clients - when hearing these facts - are shocked, appalled, and want to learn how to do something about it. Let's take a look at how these taxes are levied and what you can do about it. The first thing you must learn is what "IRD" means
Press Release Body = Your Retirement Plan Is A Tax Trap Why IRAs, 401(k)s, and Pensions May Catch Highly-Compensated Physicians
David B. Mandell, JD, MBA Keith L. Mohn, CLU, CHFC
Are you planning on leaving any dollars in your pension, 401(k) or IRA to children or grandchildren? Would you be surprised to know that the vast majority of these funds will end up with state and federal tax agencies and not your family? Did you think that - after paying taxes for a lifetime of work - your "tax qualified" plan would be taxed at rates from between 70-90%? Most clients - when hearing these facts - are shocked, appalled, and want to learn how to do something about it. Let's take a look at how these taxes are levied and what you can do about it. The first thing you must learn is what "IRD" means.
. Basics of IRD
IRD means "income in respect of a decedent" (a deceased person). This is income which would have been taxable to the decedent had the decedent lived long enough to receive it. Whoever receives these items of IRD must report them in gross income and pay any resulting income taxes in the year in which the items are actually received - typically, the year of death, in addition to any federal estate (death) taxes and state estate/inheritance taxes.
As federal taxes can reach up to near 40% (even without a state income tax), and estate tax is assessed between 37% and 50% (we'll assume 50% here), you can see how quickly the combined tax rate escalates. Although the rules provide for a partial income tax credit for estate taxes paid, the total tax on assets characterized as IRD assets can be over 90% in some cases.
What types of assets qualify for the dreaded IRD treatment? Income earned by a decedent but not yet paid, like bonuses or commissions, qualify as IRD. Once they are paid to the estate, they'll be hit with income taxes and estate taxes, under the IRD rules. The most important IRD asset? Retirement plans, such as pensions, 401(k)s, and IRAs (to the extent contributions were originally tax deductible).
. An Example: How IRD Eats Up a Retirement Plan
Let's take a simple example of Jim, a single physician, whose other assets exceed the current estate tax exemption. His IRA is fully taxable - as it was funded entirely with tax deductible contributions. (The same illustration could be made for a married couple, but the estate tax wouldn't be due until the second spouse dies if he/she were the plan beneficiary, due to the unlimited marital deduction).
Assuming Jim's fully-taxable estate of $1,000,000 is held in the IRA, Jim's estate (or heirs) would first pay $500,000 in estate taxes upon Jim's death, and then pay another $248,000+ in federal income taxes (i.e., 40% of the remaining amount after giving a deduction for federal estate taxes paid). Thus, only $250,000 or so is left out of the IRA for Jim's beneficiaries - close to 25%!
Jim's IRA: IRD Eats Up 75%!!
If Jim Liquidated The IRA Today - Less Taxes Would Be Due
In this scenario, Jim paid the income taxes on the $1,000,000 liquidation himself and his estate paid the estate taxes the next day. While these transactions were only 1 day apart, his heirs were better off in the end -- because there was no IRD. This quirk exists because the federal tax rules do not allow an income tax credit for state estate taxes paid, only for federal taxes paid. While in this illustration, the heirs benefited by only an extra $48,000 by early liquidation, there are better strategies than liquidation that can save 70% or more of the IRD taxes.
. How To Avoid The Tax Trap
What if you have already built up a large plan balance - and now realize that you don't need most or all of the funds in retirement? Unless you want 70% or more of these funds to go to state and federal taxes, you must do something . and the earlier the better. This may involve the use of advanced estate planning techniques, often requiring a roll-over, the creation of a special purpose qualified plan, and a combination of legal and financial disciplines. While the details of such techniques are beyond the scope of this article, suffice it so say here that - with advanced planning - the threat of significant IRD can be eliminated from your estate plan.
For a 40% discount on Jarvis & Mandell's new book, Wealth Protection M.D., or for an audio CD on Asset Protection please call (800) 554-7233 or email info@wealthprotectionalliance.com.
David B. Mandell, JD, MBA is an attorney, lecturer, and author of Wealth Protection, MD. He is also a co-founder of The Wealth Protection Alliance (WPA) - a nationwide network of elite independent financial advisory firms whose goal is to help clients build and preserve their wealth. Keith L. Mohn, CLU, CHFC is a financial consultant and lecturer, and President of Benefits Solutions Group, LLC, in Keego Harbor, Michigan, a full service financial consulting and planning firm specializing in working with high net worth individuals, business owners and medical professionals. Mr. Mohn has been servicing the financial needs of medical professionals since 1983, is a member of The Wealth Protection Alliance and can be reached at 248-681-9320.
Web Site = http://www.benefitsolutionsgroup.biz
Contact Details = Benefits Solutions Group, LLC
Office Address: 3477 Orchard Lake Road Keego Harbor, MI 48320
2025
