The Two Things You Are Not Told!
Economizer Red Zone Special Edition #5526
IRAs have been around for over 50 years and yet I am amazed that so many, including my fellow accountants, attorneys and other financial advisors and sadly so many fellow boomers, have no clue how they pass or ways to minimize the tax hit.
It is not like it is a special section of the IRS code, IRAs including Roths are common nowadays.
So, for arguments’ sake let’s say the rules are very well known, especially by professionals.
Over the years I have spoken to many hundreds of people and learned they really have no idea how they work. Yet people keep plowing money into those accounts not understanding the rules or the massive tax bomb they are creating.
When I asked them if they knew about keeping taxes low and how these accounts pass to family almost always, I got the same answer.
In case you don’t know what, their answer was, hint it is the 6 most expensive words in America:
It is all take care of!
I can say with certainty as an accountant that way too many people are paying too much tax on their IRAs. Yes! It is not just the DIYers. Even those that have tax advice professionals like CPA’s and attorneys or these financial talking heads still pay too much.
For almost 10 years, I was an instructor at William Paterson’s University School of Continuing and Professional on Education. During that time, I asked fellow CPAs if they advise their IRA clients to save every tax return since they started their IRA. Their answer flat out shocked me.
They asked me why and said the IRS only goes back seven tax years even in the worst-case scenario. I just give up and shake my head. How could they not tell their clients to save all those tax returns? By not saving them they will be paying taxes again on already TAXED money
The sad part, even the advisors who sold you the account have no clue as well. You get stuck paying all the unnecessary taxes. You can’t make this stuff up.
WARNING
NJ, MA, PA Taxpayers: Don’t Let a Mismatch between Your State’s Tax Laws and the Federal Rules for Deducting Contributions Result in Overpaying Your State Tax on Retirement Distributions.
Let’s get off the “tax 101 stuff” for a moment and have a POP Quiz about passing IRA type assets to family.
POP Quiz
1. Husband passes IRA to wife at his death. (They both had sweetheart wills where they named each other and if both were gone everything goes to the kids). The wife dies weeks or months later. Does the husband’s IRA go to the kids?
a. NO!
2. A Husband and wife are involved in an auto accident, and the husband dies and the wife is severely injured and cannot care for herself. She dies some months later does the dad’s IRA go to the Kids
a. NO!
3. A young man names his parents as beneficiaries of his IRA. He later marries and has a family. He changes his will ,drawn by an attorney, and names his spouse and kids as contingent beneficiaries. He dies, does his IRA go to his spouse?
a. No!
4. Man starts working and has a 401(k) at his new job he accumulates a substantial sum due to diligent saving and promotions. He splits from his wife after a few years and marries again. He changed his will to reflect the new spouse. He was married 30 years but dies before retiring. Does his IRA, 401(k) to the new wife?
a. No!
5. A man is widowed and remarries while still working. He and his new wife agree that any assets they have will go to their respective children in the event of their passing. The husband and wife get new wills and name their own children as beneficiaries. The man dies does his children get his pension plan and or his 401(k) plan.
a. No!
If you disagree with any of the no’s, sorry! You should be looking for a new advisor, accountant, attorney right away. In the meantime, just reach out through Substack chat
(I have included a how to use Substack chat in 5 easy steps) and I will tell you where the accounts wind up and how bad the tax hit will be.
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Nice article