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Things To Know About Planning For Your IRA.

IRA accounts are special because you deposit money into these accounts tax-free. This opens the door to outstanding investment opportunities, but there is a cost. The IRS is always hovering over these accounts waiting for the money to come out so that it can collect its taxes. The account owner is also constantly looking over their shoulder wondering if and when the IRS will swoop in. Here are five things to keep in mind when working with these special assets:

1. Roth IRA's Are Different. Almost none of the special concerns regarding IRA’s apply to Roth IRA’s. With Roth IRA’s the account owner pays their taxes before putting money into the account. The IRS is not hovering over the account and watching the money like a hawk. As a result, there are not nearly so many special rules and very few traps for the unwary.


You Are Only Doing Damage Control. People like to avoid taxes. Most people would say that their goal is to eliminating their tax burden and pay no tax on their IRA account. Unfortunately, that is not realistic. There are no tricks or special arrangements that eliminate taxes on an IRA account. The taxes are coming one way or another. The most you can do is decide when the tax is paid and who pays them. You cannot get a "good" outcome, so you aim for a result that is not worse than it had to be.

3. There Are Few "Good" Beneficiaries. The IRS’s rules for IRA accounts have a short list of beneficiaries who do not have to pay the tax soon after the account owner’s death. Estate planning considerations or family circumstances may make it smart to name some other beneficiary to the account. However, it is very difficult or almost impossible to do anything creative without making sacrifice when it comes to paying income taxes on the account balance. Planning is always a balancing act between the IRS’s narrow view of the world and the real world where families live.

4. Beneficiary Designations Are Very Powerful. A person’s Will or Revocable Trust does not decide who receives an IRA account after the owner dies. The beneficiary designation on the account is the only thing that decides who inherits the account. That makes it very important to know who the beneficiary is on the account and coordinate the beneficiaries with your Will or Revocable Trust. In addition, you need to be careful every time you shift your IRA’s from one plan to another or from one company to another. Those changes clear your existing beneficiary designations and you need to start over again making sure that the new designations coordinate with your Will or Revocable Trust.


Income Tax Management Changes. Early in life the name of the game is putting money into an IRA tax-free and leaving it there. Financial advisors correctly counsel that you should only take money out of your IRA as the very last of your last resorts. The IRA is almost like an enemy. However, later in life things can change.

After age 70 the government forces you to take money out with “required minimum distributions.” The money is going to come out of the IRA at some time. The focus shifts form “never take it out” to "take it out at the best time." Every taxpayer needs to look at their personal tax return to find the best time. The goal should be to withdraw the money at the lowest possible tax rate. If your accountant or tax preparer sees an opportunity to pay the lowest tax rate, then is time to change course and begin taking money out of the account. Sticking doggedly to the "never take it out" strategy can actually end up costing you and your family money.

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