Understanding How IRAs and QRPs are Taxed
QRPs (a/k/a Keogh plans) and IRAs are fully includible in one's gross estate, and are potentially
subject to Federal estate taxes. If the client has a large enough estate that estate
taxes are a concern, (in 2009, that was anything over $3.5 million), the effective
tax rate will be 45% (in 2009). Additionally, any distributions
from qualified accounts to the plan beneficiary after the owner's death are treated
as income in respect of decedent ("IRD"). IRD rules state that the beneficiary receiving
the distribution must report the gains as taxable income at their personal income
tax rates. No step-up in basis is received for these accounts. Between the estate
tax assessed on the decedent's estate, the income tax assessed on the beneficiary
receiving distributions, and your particular state's income and death taxes, it is
easy to see how so much of the account can be lost.
When does this loss generally occur? Following the death of the surviving spouse
(or after the single person's death, if unmarried). Remember, the unlimited marital
deduction can be utilized to protect all distributions between spouses from the
Federal estate tax. One must be prepared, therefore, for the losses that will occur
not during your lifetime, but after the funds left in this account are transferred
to your beneficiaries.
This Web site is intended for general information purposes only. It does not nor is it intended to constitute legal, tax or investment advice. Alliance America is not a lawyer, registered investment advisor or investment advisor representative, and is not engaged in the practice of law or the business of investment advice.