Everyone’s goal is to pay as few taxes as possible, but when planning for retirement many investors and even their advisors neglect a basic concept:
Die broke in your IRA or 401(k) account and
die rich in your personal investment account.
The tax rules dictate where to die broke and where to die rich. With a little planning and asset management, anyone can do it. Instead of fighting the tax code, take advantage of it by putting each of your retirement investments – stocks, bonds or income annuities – in the account that benefits you most.
With smart allocations, you will realize potentially huge gains.
What’s your philosophy?
Most retirees have:
- Two planning objectives – reliable lifetime income, and wealth preservation so they can leave a financial legacy to their children or others
- Two types of investment accounts – accounts built from personal savings over the years and IRA accounts that have “rolled over” from a 401(k) or similar qualified retirement plan
- Three types of financial products – bond funds, stock funds (and the stocks can be separated into high dividend or high growth) and income annuities
The task is to meet your objectives by making the best pairings from among those choices.
Here’s where the “Die Broke/Die Rich” philosophy plays a role. If you spend down your rollover account (die broke) and have plenty left in your personal investment accounts (die rich) you will take the best advantage of the tax laws.
Die rich in your personal investment accounts
When you die, the government will forgive all of the unrealized gains in your personal accounts. If you invested in a stock fund that doubled in value over 10 years, your spouse or other heirs avoid any tax based on the unrealized gains. And during your lifetime, you’ve been paying a lower tax rate on the dividends and realized capital gains.
That is not true for your rollover investment accounts, so it is much better to leave your heirs money from your personal investment account. Any amount remaining in your rollover IRA is taxed at ordinary at your death. Further, all income and distribution from your rollover IRA are also taxed at ordinary income tax rates.
So how do you die broke in your rollover IRA and maximize income? The answer is an income annuity and the new QLAC.
Note: If you are planning as a couple, the surviving spouse will realize tax savings if you both have your own personal investment accounts. When an account is owned individually, your spouse will receive the account without having to pay tax on any unrealized gains. If owned jointly, however, only half the account will escape tax on unrealized gains.
Spendable, dependable income from your Die Broke accounts
Finally, consider the additional tax benefits of a Qualifying Longevity Annuity Contract, an investment newly approved by the Internal Revenue Service.
You can buy a QLAC with the resources from your IRA or 401(k), as long as it does not exceed $125,000 or 25% of the account.
The purchase will reduce the size of the Required Minimum Distributions – which will be taxed – that you must start taking from your rollover account when you reach 70½.
In addition, the QLAC will supply income starting at a later age, usually 80 or 85, when the second stage of retirement normally begins and when expenses for medical support and home healthcare can be expected to skyrocket. The extra cash will also help avoid spending out of your personal investment accounts where you want to die rich.
When you thoughtfully manage your approach to retirement to fit your goals, you can maximize after-tax income for yourself and after-tax wealth for your heirs.
Ask Jerry: 401(k) or Roth IRA to fund an annuity?
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