I have an associate that is 73 with approx one million in a traditional IRA. Their financial advisor is encouraging them to withdraw a large portion and place it in an annuity because there will be less taxes when they die. This would leave their heirs with more and uncle Sam with less. Now I know Bob does not look favorably on annuities particularily when the financial advisor has so much to gain in way of commissions. My question is: What is the best way to shelter one million dollars in a traditional IRA from taxes?
Commissions aside, I think the financial planner is a crook or incompetent or both. I would love to see the numbers on this one.If your colleague is already 73, then he is already taking minimum distrbutions mandated by the tax laws? Is he taking minimum distributions or more than minimum? A good qualified planner, CPA or Estate Attorney should run the numbers.I bet the planner is thinking of his own back pocket and not your friend's.Best wishes!Alan McKnight, CFP
I have an associate that is 73 with approx one million in a traditional IRA. Their financial advisor is encouraging them to withdraw a large portion and place it in an annuity because there will be less taxes when they die. This would leave their heirs with more and uncle Sam with less. Now I know Bob does not look favorably on annuities particularily when the financial advisor has so much to gain in way of commissions. My question is: What is the best way to shelter one million dollars in a traditional IRA from taxes? If he withdraws the money from the IRA he will pay regular tax on it. The adviser should be telling him to buy the annuity inside the IRA to avoid paying income tax on the money used to fund the annuity. If he realy said to buy the annuity outside of the IRA find a new advisor.I do not know of any tax savings between the IRA and annuity. If tax savings is the reason for the annuity I would not go to the annuity.My impression is that having an annuity as part of an estate can lead to very heavy taxation. I think the planner is giving bad advice.Look at converting part of the IRA to a Roth and investing in stock for the heirs. Taxes are due when the conversion is made but all future growth is tax free and the funds maybe able to grow for decades. There will be minimal annual withdrawls required by the heirs but the assets can still grow all their lives and be their for their retirement.If married maybe taking money out of IRA and putting it in wifes name may make full use of the 650,000 exemption each has. Also, could take money out of IRA and make gifts. Would save estate tax but not income tax.I think a good fee only planner or an estate planning attorney maybe the best investment at this point.I think I would look for another opinion
Repost this question on the Tax board for a more complete answer.Your associate has to worry about leaving too much money inside the IRA (don't forget the $650k estate limit). Plus, depending on when he started withdrawals, his heirs will have to deplete the inherited IRA accordingly.And the previous posts are right. An annuity in an IRA is a crime. An annuity paid with withdrawn IRA money is a crime, too, as the annuity is taxed as ordinary income. It would be better to put the withdrawn money into a buy & hold stock portfolio, as the stocks would be given a stepped-up basis at your associates death.There was a solution suggesting that if you were withdrawing money from an IRA that you did not need, that you paid a mortgage with that money. Since most of the mortgage payment would be tax-deductible, you would be getting the house, tax-free.Zev
Another twist to the decision is his minimum distribution calculation.If it is "do not recalculate life expectancy" then the heirs will be able to continue the minimum distribution payments. This will increase the time the money has to earn tax deferred.With this much money on the line, I would expect other dollars are involved outside the IRA. This is definitely a go see an estate planning professional (lawyer, CPA, Trust officer) and/or fee based investment advisor. Don't see someone who gets paid commission to sell an investment product.
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