Tips to Reduce Taxes on Withdrawls from an IRA

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

Following are some suggestions:

  • April 1st after you turn 70 years is a crucial date. You must make all decisions concerning beneficiaries, heirs, payouts, distribution status, etc. before this date. After this date, you cannot make any decisions concerning your IRA.
  • If you are going to leave just your spouse as an heir, choose joint payout. It lowers the minimum you have to take out of your IRA each year after you turn 70 years of age. After you pass away, your spouse can rollover the IRA into their name and restart the IRA all over again, renaming heirs. This way the IRA keeps going.
  • If you are going to name your children as beneficiaries, do it under a trust. The money is always tax-deferred and after you pass 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 IRA. Don't let them make the decisions for you. Be very careful with the paperwork. You are the owner of the IRA. Whatever you 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 your payments to a minimum. On a higher note, the savings penalty tax is estate tax deductible.
  • Explain the rules to your 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.