My wife and I will both be 70 1/2 this year and thus required to make a withdrawal from my 401K. I will elect to have her as my beneficiary and use the joint life expectancy table to determine the divisor. But now I have to choose to either recalculate each year or choose term certain. Each has it's advantages and disadvantages.Recalculation enables us to stretch out smaller payments over a longer period of time and would seem like the obvious choice since we have no immediate need for the money. But if she predeceases me, my heirs, at the time of my death, would be forced to receive the entire remaining balance in one lump sum the next year and that could be a considerable 7 figure amount. The tax consequences would be formidable.Term certain would guarantee an almost 20 year payout regardless of the order of our deaths but the payments would be larger and for a shorter period of time. The question is - which to choose. Any thoughts?
Greetings, Ovathehill, and welcome. You wrote:<<The question is - which to choose. Any thoughts?>>With the term certain, you know absolutely that if you both die the kids may use the remaining period to spread out the payments and possibly keep income taxes to a minimum. With recalculation, it's entirely possible your wife could predecease you, so on your death the balance will be paid out within a year. It's just me, but I prefer the bird in hand and would go with the term certain method. Good luck to you as you work through this decision.Regards..Pixy
The previous answer leaned toward the term certain method. I plan to use the recalculation method starting at age 70. I have a different policy because of having different goals. Now age 60, I intend to live chiefly off my taxable account for the next ten years, as I have for the past seven years. This will not at all exhaust the taxable account. I will take only smallish withdrawals (around 2%) from the IRA annually in my 60's. Those withdrawals are the best I can do to take the edge off large income tax bills after age 69 without prematurely eroding the tax shelter of the IRA. My policy may differ from yours because I do not intend to leave my IRA to any person, but to a tax-exempt foundation. (National Taxpayer's Union Foundation, to be specific, as a way of expressing my anger that the IRA balance would otherwise be subject to both income taxes and inheritance taxes, leaving only a small fraction for the heirs. NTUF's educational mission is to inform the public about the spending consequences of each Congress member's actual votes, rather than the campaign promises.) I'll reconsider this if, contrary to my expectations, the estate tax is scrapped over Clinton's objections.With the term certain method, your income taxes are likely to grow every year as your withdrawals do, reaching some amazing heights as you have to take a third, a half and then all the remaining assets out of the IRA in the last three years of the certain term. Of course, you can spread out that tax burden by making withdrawals greater than the minimum required in the earlier years of the term. That would use up the tax deferral even faster.Chips, whose other potential heirs are people who know how to manage money (and therefore have no need of an inheritance) or who do not know how to manage money (and therefore could be harmed by an inheritance)
This is interesting. I did not know you could leave your IRA to charity. I was planning to take it out fast to avoid the double taxation. I am leaving substanial amounts to charity because of the heavy estate tax bite I will have. I would rather decide where my money goes myself.
Would it not be better to use the funds in your IRAs first before touching assets in your regular accounts as assets in "regular accounts" that are left untouched are growing tax deferred and at one's death, the remaining assets would be inherited at a stepped-up basis thus avoiding taxes? (Provided their is no change in the estate tax laws!)
I would rather decide where my money goes myself. Me too. Thanks for your response. I am including a couple of references, for what they're worth to you. It's great when people can provide references for their assertions around here, rather than leaving you with just some faceless stranger's comments. (If any one reading this can provide quotations from IRS sources to confirm, clarify or contradict my quotations, please post them.)http://www.caller.com/primetime/stories/1097berg.htm If the individual is planning to leave assets to charity, IRA assets would be an ideal choice. IRA assets left to charity will reduce both income and estate taxes. http://www.dtonline.com/pfa/payout.htm -- IRA Payout and Beneficiary Issues, Deloitte & Touche --Private foundations and charities can also be beneficiaries of IRA assets. Only the IRA owner's life expectancy may be used for determining distributions. By operation of law, the account balance will be distributed to the charitable organization. The owner's estate will not be subject to estate taxes on the amount contributed to the charity, and income taxes will not be levied on the retirement account balance.Best wishes in making your decision from . . .the faceless Chips
Would it not be better to use the funds in your IRAs first before touching assets in your regular accounts as assets in "regular accounts" that are left untouched are growing tax deferred and at one's death, the remaining assets would be inherited at a stepped-up basis thus avoiding taxes? (Provided their is no change in the estate tax laws!)That would be better or not better depending on your goals and your current wealth. If I take money from the taxable account, a big part of it is tax-free return of capital, and the rest is taxed at capital-gains tax rates. This way, IRS gets a fairly small share of my withdrawals. If I take money from the tax-deferred account, all of it is taxed as ordinary income. That way, IRS would get a relatively large share of my withdrawals. So, in the short run, using the taxable account first is preferable. With my goals and assets, that is preferable in the long run also, as I explain next.I use an Excel spread-sheet for my personal financial planning with a 35 year horizon. (Of course, I have to estimate what investment returns and inflation will be, but I can vary these guesses to see how sensitive the results are.) Based on the built-in optimizing software, Solver in Excel, I use the spread sheet to pick an annual after-tax budget (adjusted annually thereafter for inflation) for myself that keeps the purchasing power of my retirement assets as nearly level as possible. (The resulting withdrawal rates from the retirement assets are in the range of 3% to 4% over the years to cover both income taxes and personal living expenses.) Then, for that budget, I use Solver a second time to pick optimal optional withdrawals from my IRA in my 60's that maximize the size of that final estate. This is a minor effect -- about 2% a year withdrawals from the IRA for a few percentage points extra in the estate at the end of the plan. When my estate was much smaller a few years ago, the optimal optional withdrawals were zero. You have to estimate your income taxes for each year of the retirement plan to detect this effect. Some people have (correctly) pointed out that the income tax laws will change almost certainly, which will harm the accuracy of your predictions. Well, I can't predict market returns or inflation with certainty either, but that doesn't keep me from making the best (conservative) estimates I can on all these matters, understanding that reality will require some revisions from me.Your point about the remaining assets being inherited on a stepped-up basis is valid if, unlike me, you are leaving assets to people and, as you warn, that step up is not eliminated along with estate taxes. Actually, I might relent and leave people whatever assets I can up to the tax-free limit.Chips, who finds it very difficult to pay any tax that can be postponed instead
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