| it is to save for retirement. In fact, if we put $1,000 away for someone
graduating from college today, it would be worth over $72,000 by the time they start
collecting social security. (This assumes graduation at age 22, social security at age 67,
and a 10% rate of return.) Albert Einstein called the power of compounding the eighth
wonder of the world.
Today's workers can do this retirement savings with pre-tax dollars in their 401k or IRA.
But what happens when the time comes and you withdraw the money? The entire withdrawal is
subject to income tax. If you die and leave your 401k or IRA to your children or other
beneficiaries, it is taxable upon withdrawal by them. Further, if you die with more than
$2 million, including your retirement assets, the balance of the retirement plan before
the impact of income tax will
be included in determining your estate taxation.
The
combined affect of estate and income taxation could result in the majority of the assets
going to pay taxes. For example, assets over $2 million are estate taxed at 45%. In
addition, if some of the assets are withdrawn to pay the estate tax, the withdrawal would
incur federal and state income tax of as much as 35% or 40%. So, you could easily have
two-thirds of the assets going to taxes.
There
are a few strategies to help soften the blow of the tax bite on retirement plans. First,
you can defer the income taxes as long as possible. After you reach 70.5 years, you must
start taking distributions based on the "Uniform Lifetime Table." Based on this
table, you would take approximately 1/27th the first year and slowly increasing ... |
