Peacock Tales • Spring 2014

A Penny Saved...Is a Penny Taxed

By Richard J. Amrhein

Are you retired? Are you receiving Social Security? Do you have an IRA or a 401(k)?

If your answer is yes to all of the above three questions, we have a fourth question for you. Are you spending your Social Security before taking distributions from your IRA or 401(k)? If you are living off your Social Security and saving your retirement, you might wish to reconsider. It may be more advantageous to live off your retirement and bank your Social Security if you do not need both to make ends meet.

Assuming your contributions to the IRA or 401(k) were pre-tax, and the IRA is not a Roth IRA (funded after taxes), distributions from the IRA or your 401(k) are taxable as distributed. If they are drawn down over a period of years, you have the possibility of paying at a lower effective tax rate, paying less taxes over time. Whereas if they are left to accumulate until you pass on, your heirs may have to take lump sum payments and pay income taxes at a higher overall tax rate as a result. Pennsylvania Inheritance Tax will also be due on the date of death value at the rates of: 4½% for children; 12% for siblings and 15% for others. If you are fortunate enough to be in a federal estate tax bracket ($5.34 million for individuals; $10.68 million for a married couple as of 2014) there could be federal estate taxes of 40% as well.

If you are of a charitable mindset, instead of leaving money to your church or other charitable entity you might consider designating such as a beneficiary of your IRA or 401(k). If paid to a recognized charity, that charity will neither incur death taxes nor income taxes on any amount received.
As with all financial matters, it is always recommended that you consult your financial planner, investment advisor and/or your tax preparer to determine what is the best course for you in electing and taking distributions of such retirement funds.

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