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An IRA and tax implications for beneficiaries

When you're planning your estate, one thing you shouldn't overlook is the potential for your beneficiaries to be taxed. To prevent this from happening or to lessen the tax burden, there are a few things you can do, especially if one of your assets is an individual retirement account.

With an IRA, it's simple to choose a beneficiary or beneficiaries who can receive the account after your passing. The assets won't head to probate court, saving your beneficiaries time and money. Your estate plan should have information on your IRA, so your beneficiaries know to expect the account to pay out to them.

Individual retirement accounts don't always provide the same tax protections you'd have to your beneficiaries, which is where a concern may lie. Your beneficiaries will need to include any taxable distributions they receive on their income tax form, which could mean paying higher taxes on that income.

One way to protect the IRA payout is to roll that IRA over into another one that the beneficiary already has, since IRAs are generally protected from taxes. If the money isn't withdrawn completely, taxation might be avoided, depending on the situation. If your beneficiaries don't have an IRA, now is a good time to have them talk to your attorney or their own about the potential ways to avoid high taxation on an IRA payout. In the case that the IRA was created with post-tax income, beneficiaries may not need to pay any taxes on them. However, if not, they could be pushed into a higher tax bracket, which could impact their taxes for that year.

Source: Forbes, "Estate Planning Tip: Creditor Protection for IRAs & Beneficiaries," Eric Dunner, J.C., CFP, Dec. 09, 2016

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