Tax Tips to Reduce Taxes on Withdrawals from an IRA

It is hard enough making financial decisions towards the end of one's life that will affect their family for the next few decades after they are gone, but to make them in such a way that the IRS doesn't make off with most of their money in this world is truly the challenge.

Following are some suggestions:

  • April 1st after your client turns 70 years is a crucial date. They must make all decisions concerning beneficiaries, heirs, payouts, distribution status, etc. before this date. After this date, they cannot make any decisions concerning their IRA.
  • If your client is going to leave just their spouse as an heir, choose joint payout. It lowers the minimum your client has to take out of their IRA each year after your client turns 70 years of age. After he/she passes away, their spouse can rollover the IRA into their name and restart the IRA all over again, renaming heirs. This way the IRA keeps going.
  • If your client is going to name their children as beneficiaries, do it under a trust. The money is always tax-deferred and after your client passes away, the children receive estate tax deductible payouts annually from the trust. After the heirs pass away the principal goes to the charity.
  • Be very careful when dealing with sponsors of your client's IRA. Don't let them make the decisions for your client. Advise your client to be at their sharpest the day the IRA is drafted. Tell them to be very careful with the paperwork. They are the owner of the IRA. Whatever they specify is what should be contained in the policies.
  • Keep in mind that the savings penalty tax that comes back in the year 2000. It's a 15% penalty tax on IRA distributions that annually exceed $155,000. Unfortunately, the only way out of this is to try to keep the payments to a minimum. On a higher note, the savings penalty tax is estate tax deductible.
  • Explain the rules to your client's spouse and heirs. The person who is left the estate of the owner, not the beneficiaries of the IRA, pays the estate tax on the IRA. But only the beneficiaries of the IRA are the ones who can claim the tax deduction on it.