Tax liability can emerge from time-sensitive decisions brought about by an inherited annuity. This article from Financial Planning gives alternative solutions that can significantly decrease tax liabilities. Inheriting an annuity shouldn’t be stressful. Beneficiaries need not immediately reach for their tax liability calculator or look into offshore tax havens. A little know-how may be all you need to decrease your tax liability and save significant amounts in assets.
Decreasing Your Tax Liability: A Beneficiary’s Guide
The death of a loved one who sought to pass down an annuity poses a time-sensitive decision on the beneficiary, with massive tax implications.The potential tax liability to clients may climb as high as hundreds of thousands of dollars if they elect for a lump-sum distribution when inheriting a non-qualified deferred annuity, according to Laird Johnson, the senior director of advanced markets for AXA Distributors.
Inherited annuities always have the potential to bring tax liabilities. In this example, the beneficiaries would be required to pay full-income taxes for a lump-sum distribution. With a non-qualified annuity, the accrued interest in the account is taxed as regular income.
How can beneficiaries get out of liabilities such as this?
Smart Solutions to Cut Tax Liability
The article above suggests the stretch option and the 1035 exchange. With the former, instead of withdrawing the annuity as a lump sum, annuitants can opt to have the distribution over an extended period of time. This way, the beneficiary can control when funds are subject to taxes. Withdrawing during retirement, for example, will likely result in lower income taxes.
This is also the recommended option for spousal beneficiaries who inherit IRAs; the beneficiary can grow wealth within the IRA over decades. Spouses also have the option to roll the assets into their own IRAs. Then, until the age of 70 1/2, they postpone distributions from a traditional IRA. The spouse may, however, withdraw only at the age of 59 1/2 or older to avoid incurring a 10% penalty.
Non-spouses, however, must receive distributions every year beginning on December 31 in the year the original owner died. The distribution minimum follows a relatively simple formula. Beneficiaries can enjoy tax advantages and evade tax liability when they apply the stretch option apart from the yearly distributions. This allows them to compound assets over many years.
Maximizing Annuity, Minimizing Taxes
Can a spouse who is not named as a beneficiary receive assets from an IRA? https://t.co/ORqr8J5ibF
— The IRA Factor (@theIRAfactor) September 1, 2017
It’s understandable for beneficiaries to feel stress upon receiving an inheritance. Apart from having to deal with the death of a loved one, annuities present what seem to be endless complications. However, an awareness of key policies is crucial. Knowing how to minimize tax liabilities helps you conduct the best possible strategy for maximizing passed down annuity. Just as in the article, you too can avoid massive sums in tax liabilities.
Don’t let your IRA become a tax disaster. Watch this video on how to carefully plan out your IRA for the years ahead:
Know any tips and tricks to avoid tax liability? We’d love to know. Share them with us in the comments section below.