Estate Planning Mistake Seven: Not Preserving Tax Deferral Benefits of Retirement Plans

Estate Planning Mistake #7
Not Preserving Tax Deferral Benefits of Retirement Plans

Whether you have spent your life working for a company or manning the helm of your own business (or both!), you have likely been storing money away in your company’s 401k plan or an IRA of your own. The benefit of an IRA is that you can invest your money tax-free. Of course, those taxes have to come out sometime. Once you reach the age of 59 and a half, you can begin withdrawing money from your IRA, and the money will be taxed at that time. If you pull the money out too early, your withdrawal will be hit with taxes AND penalties.

What will happen to the money in your IRA if you should pass away? If your spouse is your beneficiary, they can roll your IRA money into their own IRA, which they can then access without penalty at the age of 59 and a half. However, if your children are your beneficiary, that’s a whole different story.

Most people choose not to withdraw money from their IRA early in order to avoid the heavy financial penalties. Likewise, you do not want your children to incur those penalties if they should inherit your IRA. It could happen, but there are ways that you can help protect that money from hefty taxes and penalties and allow it to grow during your child’s lifetime. You child can even take regular income from the account in the form of the required minimum distribution.

In part seven of my series, 12 Common Estate Planning Mistakes and How to Avoid Them, I discuss why it’s a good idea for your child to not take immediate distribution of your IRA and how you can protect that money from big penalties and taxes.

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