Ever heard of Income in Respect to Decedent? No?
Do you have an IRA, 401k, TSP, 403b? Yes?
Hmmmm….well let me introduce you to your new friend Mr. IRD. You’ll get to know Mr. IRD quite well if you inherit an IRA or if you leave one to an heir.
Why? Because IRD is the income tax you or your heirs will pay on the money they received from the IRA that was inherited.
IRD is really nothing more than ordinary income tax on IRAs that a heir must pay. But for some reason a lot of folks overlook the HUGE tax consequence of leaving an IRA asset to an heir.
Let me solve that dilemma for you right now Your heirs receive an IRA. Your heirs are likely to take a lump sum distribution. Your heirs will then be stuck with a HUGE tax bill in a few short months when they file their taxes.
In fact, it gets even better because the distribution from the inherited IRA only serves to add to their taxable income and thus increase their tax bracket.
So, if they were making 100k before and were married they were in the 12% bracket. Now, on a a $300k IRA distribution they are in the 32% bracket and effectively lose over a third of the IRA to the Feds.
I wonder if that money could have been better used…by YOU???