Tax Implications on Retirement Plans

Estate Tax

All of those retirement plans that you are maintaining (IRA, 401(k), 403(b), Roth IRA) are potentially exposed to taxes at the time of your death. According to Federal Income Tax Law, federal estate tax may be due on the remaining balances in your retirement accounts when you pass away. Regardless if the beneficiary decides to withdraw the entire amount in one lump sum or will take out timely payments, the sum in these accounts are subject to estate tax. What the IRS looks at is the dollar value of the retirement account at the time of death. These retirement accounts are automatically part of your estate as soon as you become deceased.  Keep in mind most middle class individuals have nothing to worry about when it comes to the estate tax implications of retirement accounts. The beneficiary would have to receive an estate exceeding $5.43 million per individual to have the estate be subject to estate tax.

Income Tax

As the beneficiary, you are certainly subject to income tax. Just to quiz you on your knowledge of retirement accounts, which retirement account do you think you would need to pay income tax on as the beneficiary of the account, a traditional IRA or a Roth IRA? Remember, with a traditional IRA, it is tax deferred where is with the Roth IRA, you pay tax up front. The answer is traditional IRA. Just as how it is subject to income tax for the individual when withdrawals are made, it is now too subject to income to withdrawals from the beneficiary. Since the Roth already had its funds taxed when first deposited, you would be receiving tax free payments.

Keep a few things in mind: As the surviving spouse, you can roll over the funds into your own personal retirement account to avoid taxation. The funds would be treated as if they were originally yours. So as an example, if you were the beneficiary of your spouses traditional IRA, it would be rolled over into your own personal IRA and it would only be subject to federal income tax when you start withdrawing the funds. While on the subject of the surviving spouse, they are automatically the beneficiary of the retirement accounts of their spouse unless they choose to waive that right.

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Kamilla Mishiyeva, Esq., is an estate planning and probate lawyer in New York City. She has locations in Brooklyn and Manhattan. As a probate and an estate planning attorney, her knowledge has to go beyond the law. Her awareness of tax planning and financial investing are crucial in giving her clients an edge when it comes to truly increasing their wealth. You can visit her website at http://www.NYCProbateLawyer.com/ today should you have any need for assistance with probate litigation, probate administration, estate planning, and trust and will drafting.