Deferring Income Tax
Within the Internal Revenue Code, some of the laws that most benefit you and I are those the allow the beneficiaries (you and I) of qualified retirement plans (think IRAs, etc.) to defer our income tax liability until the beneficiary withdraws money out of the IRA. These laws allow your IRA’s principal to grow tax-free, which means that your IRA has more money value than if it were subject to taxes.
Required Minimum Distributions
There is another Internal Revenue Code law that allows you to take out what is called a “required minimum distribution.” This law allows your IRA to distribute money to you over a longer period of time than if you were forced to take a higher distribution. The way this is calculated is linked with your current age and your expected life span. It also defers the income tax that you would have to pay on the principal in the plan that you have not yet received as a distribution.
Sadly, many people do not know about these advantages and so do not use these laws. Instead, they withdraw all their funds and pay all the taxes up front, rather than deferring the taxes and allowing the principal to grow.
Naming Your Trust as Beneficiary
Many people do not think that you should name your trust as the beneficiary of your qualified retirement plan. They say this is because it is too complex and you cannot stretch out distributions through the required minimum distributions. However, while a trust as beneficiary is a more complex setup, the difference is minor. Also, you can still use a trust to stretch out distributions, and the trust can make sure to maximize your income tax deferral, providing a greater tax benefit to you.
Ultimately, the decision of how to best use your qualified retirement plan is a personal decision that only you can make. I invite you to contact The Rains Law Firm or schedule a meeting to discuss what option you want for yourself and your family.