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YOUR 401(k), 403(b), IRA, and Similar Plans

These include making contributions in the form of:
* stocks which have appreciated
* an insurance policy no longer needed
* a remainder interest in real property
* and, of course, setting up a charitable remainder trust (CRT).

But a recent article suggests an even more persuasive reason for setting up a CRT: to prevent "confiscatory" taxes on your tax-deferred retirement plans.

"Confiscatory" Taxes

According to a recent article, "retirement plan assets potentially are subject to a combination of taxes which, in the aggregate, reasonably can be described as confiscatory. . . . Retirement plan assets held until death may be subject to a devastating combination of three differ-ent taxes."

These three taxes --  taxes on "income in respect of a decedent," estate taxes, and the excess accumulations tax -- "can approach or exceed 85 percent; a rate most would call confiscatory."

The article concludes, therefore, that "even those individuals who would not, however, in the absence of adverse tax consequences, be charitably inclined, may find that dedicating retirement plan assets to charitable purposes in appropriate circumstances is a desirable alternative to 'losing' such assets to taxation.

To Avoid Losing Assets

To avoid losing up to 85% of the money accumulated in 401(k), 403(b), IRA, and similar plans, the authors suggest two tactics.

* First, "if a plan participant intends in any event to make an exclusively charitable disposition upon death, it can be highly beneficial to fund that disposition with retirement plan proceeds, as opposed to other assets."

For example, designating a charity as the beneficiary of an IRA or similar plan can gener-ate huge tax savings.

* Second, the authors suggest using a charitable remainder trust (CRT).

* Indeed, the article shows how, using a CRT, an 85-year-old with a $1 million IRA could make "at least $426,058 available to support the annuity or unitrust payments to the children -- for their entire lives, if desired." Thus the tax savings can be enormous.

What You Can Do Now

* To avoid possible confiscatory taxa-tion of the money in your retirement plans, write to ASH now while the issue of taxes is still on your mind.

* We will send you a copy of the entire article to read for yourself, and possibly discuss with your spouse, children, and tax advisors. It's your money, but only if you take steps to protect it.
 

Reviewed: June 7, 2004