Estate Planning With IRAs - The Basics
By Adam D. King Platinum Quality Author

Estate planning with IRAs can pose some unique problems, mainly because of applicable tax rules. When an IRA account owner dies, the balance in the account may be subject to two different kinds of taxes.

In other words, if you fail to plan carefully while you are alive, your beneficiaries may only receive a small portion of what you worked to save for them. The account can be hit with, what amounts to double taxes. The two types of taxes that are relevant to estate planning with IRAs are income and estate taxes. The estate or inheritance tax is an amount that your beneficiaries will have to pay on any money that you leave to them. Depending on where your beneficiaries live, these taxes may be incurred at both the federal and state level.

Estate or inheritance taxes only apply to very large estates. An inheritance that exceeds two million dollars total is subject to the tax. Basically, if you leave all of the wealth that you have accumulated to one heir and the combined value of your real and personal property exceeds $2 million, at the time of your death, that heir will pay estate taxes.

Two million may seem like a lot, but you have to consider the value of any real estate that you own, your stock holdings and your personal possessions, (cars, jewelry, etc.), as well as your bank and IRA accounts. There are a number of ways to avoid the estate tax, including one time gifts and trusts. If you have a large estate, you should consult a lawyer knowledgeable in estate planning with IRAs and other property.

For estate planning with IRAs of any type other than the Roth, income taxes have to be considered. Disbursements made to beneficiaries will have to be reported on their income tax returns. But, estate tax rates are quite a bit higher than income tax rates, sometimes exceeding 50%.

Non-taxable disbursements are one of the primary advantages that the Roth IRA has over the traditional IRA. Contributions to a Roth are taxed as regular income, so disbursements and gains made within the account are not normally taxable.

Because there are no capital gains taxes, a growing number of people are using their Roth IRAs to invest in real estate. Real estate holdings within the account should not complicate estate planning with IRAs, but you may want to check with your attorney, just to be sure.

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