IRA Tax and Distribution Planning

Tax planning for a large IRA can pose a number of complex problems and is made more difficult by the convoluted and complex distribution rules, including rules on mandatory and minimum distributions. On the death of the IRA owner, the IRA faces a potential tax double-hit. First, the value of the account is includable in the personís taxable estate for estate tax purposes. Second, payments from the IRA to other beneficiaries are subject to income taxes.

Even though IRAs are commonly thought of as income tax-related devices, the estate tax implications of IRAs can be even more significant because estate tax rates are often substantially higher than income tax rates. Estate tax rates, for example, can often approach or exceed 50%. For this reason, part of the process of planning for a large IRA is balancing income tax and estate tax consequences against each other.

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