Retirement Account Income Taxes

Retirement accounts do not always get much attention when clients are estate planning. It’s easy to think, “Well, I’ll talk to my financial advisor and make sure that she has the names of all of my beneficiaries.” This is not the only consideration. You also need to plan for the tax associated with distributions from retirement accounts.

In the past few years, estate planning attorneys told their Ohio based clients that we don’t really worry much about estate taxes. In tax year 2021, individuals may currently transfer $11.7 million of assets free of federal estate tax. A married couple may transfer $23.4 million. Ohio does not currently have an estate tax. It’s important to remember that these exemption levels are not permanent and are always subject to change with a change in the leadership in government.

While estate tax is not a consideration for most couples, income tax usually is. Beginning at age 72, IRA owners must take required minimum distributions (RMDs) from their accounts. Because the IRA owners contribute to their accounts on a tax deferred basis, RMDs ensure that the government earns tax revenue when the distributions are paid out. This is also true when someone inherits an IRA.

Prior to 2020, when the owner of an IRA died, the beneficiary of that IRA had the ability to take distributions over the course of his/her lifetime. While this is still true for some beneficiaries (like the IRA owner’s surviving spouse); it’s not true for most beneficiaries (like the IRA owner’s adult children). After this change in the law it is important consider who will inherit your retirement accounts. If one of your children could likely inherit your retirement accounts when they are in their peak earning years, the RMDs that they will have to take could push them into an even higher tax bracket.