Retirement Planning Articles

Text Size: A A A

Strategies To Protect Retirement Assets From Taxes

As hard as it is to believe, today’s tax-advantaged plans — including individual retirement accounts (IRAs), 401(k)s, and rollover IRAs — may be capable of meeting retirement goals. (A 401(k) contribution of $433 per month, at a hypothetical rate of 8% compounded monthly, would be worth more than $1 million after 35 years.)*

These plans are also highly vulnerable to tax losses, if they are not bequeathed properly. For instance, a $1 million dollar IRA inheritance could be whittled to almost nothing under a combination of estate taxes, income taxes at the highest rates, and missed withdrawal deadlines. Even though this particular example may seem extreme, it stresses that advanced preparation is important.

Saving your heirs thousands of tax dollars on your retirement money hinges mostly on decisions you make before you retire. Therefore, it’s important to take a look now at how to save heirs tax headaches later on.

*When distributed ordinary income taxes would apply. This example is hypothetical and is not meant to be tax advice and does not represent the performance of a specific investment. Please contact your tax or financial professional as to how this information could apply to your situation, since individual investor results will vary.

Lighten Your Heirs’ Tax Burdens

For the tax conscious, the premise behind retirement plan distributions is simple — the longer you are expected to live, the less the IRS requires you to withdraw (and pay taxes on) each year. The IRS rules greatly simplify the calculations of required minimum distributions. However you should consult your tax advisor about how the rules may affect your situation. (Remember, too, that if you or your heirs do not withdraw minimum amounts when required, you may have to pay a 50% excise tax for that year on the amount not distributed as required.)

Select A Beneficiary

If no one is named, your assets could end up in probate and your beneficiaries could be taking distributions faster than they expected (which could also happen if your estate becomes the beneficiary). In many cases, spousal beneficiaries are ideal because they have several advantages over other beneficiaries, including the marital deduction for the federal estate tax, and the ability to transfer plan assets into a rollover IRA.

Know Your Options

The minimum distributions regulations have significantly simplified the calculation of lifetime minimum distributions as well as expanded the options available to beneficiaries after the participant’s death. If your goal is to take the least out of your IRA or qualified plan as possible, it is imperative that you and your heirs educate yourselves on the options available to enable you to reach your goals. Consult with your legal or tax advisor to discuss the best way to structure your qualified or IRA assets to ensure that you have structured them properly to take advantage of the new rules.

Talk To Your Family Without Delay

You must consult your legal and tax advisors before making any decisions concerning estate planning. It’s equally important to talk with those who may bequeath a retirement legacy to you — such as parents or grandparents — to see what type of tax planning they’ve put in place. Opening the doors to this discussion could make your tax burden lighter later on and bring peace of mind to your family. Likewise, talk to them about your wishes.

With careful planning, your retirement assets can remain as vital as they had been during your lifetime. Consulting a financial professional can help ensure that your plans are consistent with your objectives.

Points To Remember

If retirement plan assets aren’t bequeathed properly, heirs could lose about half of this inheritance to taxes.
The younger you are, the longer your life expectancy is for distribution purposes. Thus, the smaller your required distribution.
Some easy ways to consider making plan distributions more tax-efficient for your heirs include having knowledge of the minimum distribution rules and carefully choosing your beneficiaries.
Plan heirs can manage taxes on inherited plan assets by taking advantage of the greater flexibility under the new minimum distribution regulations, observing minimum distribution deadlines, and taking special tax deductions, if eligible.

Related Content

Saving For Retirement Articles

Common Questions

More Retirement Planning Information

(03/07)

Securities products and services are offered through AXA Equitable (member FINRA and SIPC), 1290 Avenue of the Americas, NY, NY 10104 (212-314-4600). Read it carefully before you invest or send money. Securities (including mutual funds) are not FDIC insured, not bank guaranteed and subject to investment risk, including possible loss of principal invested. Estate planning is offered using life insurance and other financial products.

Amount in equity investments are subject to fluctuation in value and market risk, including loss of principal.

International securities carry additional risk including currency exchange fluctuation and different government regulations, economic conditions or accounting standards.

Stocks of small-size companies may have less liquidity than those of larger companies and may be subject to greater price volatility than the over all stock market. Smaller company stock involve a greater risk than is customarily associated with more established companies.

Bond investments are subject to interest rate risk so that when interest rates rise, the prices of bonds can decrease and the investor can loose principal value.

An investment in a money market fund is not insured or guarantee by the Federal Deposit Insurance Corporation or any other government agency.

Please consider the charges, risk, expenses and investment objectives carefully before purchasing a mutual fund. For a prospectus containing this and other information, please contact a financial professional. Read it carefully before you invest or send money.

Life insurance and annuities are issued by and affiliate, AXA Equitable Life Insurance Company (NY, NY) and by various unaffiliated carriers.

AXA Advisors and AXA Equitable do not provide tax or legal advice.

Information provided has been prepared from Standard & Poor's sources and data we believe to be accurate, but we make no representation as to its accuracy or completeness. Data and information is provided for informational purposes only, and is not intended for solicitation or trading purposes. Standard & Poor's is not an affiliate of AXA Equitable. Please consult your tax and legal advisors regarding your individual situation. Neither AXA Equitable nor any of the data provided by AXA Equitable or its content providers, such as Standard & Poor's, shall be liable for any errors or delays in the content, or for the actions taken in reliance therein. By accessing the AXA Equitable website, a user agrees to abide by the terms and conditions of the site including not redistributing the information found therein.