Turn Your IRA in to a Cash Time Machine

Check out this theoretical yet common family scenario. We see this for so many couples; when they were both alive, their annual income tax liability was pretty low, less than $1,500. But upon either one of them dying, the annual income tax liability for that surviving spouse was projected to increase to over $7,500, more than a $6,000 increase!<br><br>A tax increase? What!!<br><br>It’s because a good portion of their income comes from their IRAs. While they are both alive, they file tax returns as “married, filing jointly”. These tax brackets are amongst the most lenient in the entire tax code.<br><br>What happens to the Tax Bracket?<br><br>But, when one of them dies, the surviving spouse files taxes as a “single” taxpayer. These are probably the harshest brackets in the tax code.<br><br>And similar to a great deal of people, the clients we’re referring to had a large percentage of their assets in retirement plans. IRAs and other retirement plans like 401ks, 403bs, etc. can cause significant tax challenges for surviving spouses, as we see in our little example.<br><br><b>Now you need to brace yourself</b><br> <br>This scenario is not that uncommon. Believe it or not, it is actually a quite common issue, and it may very well pertain to you.<br><br>What exactly should you do about this? That is definitely the $64,000 question.<br><br>First, you need to find out what your tax return would look like for your surviving spouse (or you, if you are the survivor). This analysis will tell you if you have a potential problem.<br>If you do, then here’s a really simple idea that you might want to consider. <br><br><b>WARNING: it is an idea that would typically not be on your list of options. Are you ready?</b><br><br>Why not distribute some extra income out of your IRA (or other retirement plan) today, and each year thereafter, while you and your spouse are both alive and enjoying those lenient tax brackets? Yes, you will owe additional tax on those distributions, but here is the important part – that additional tax does NOT affect your current lifestyle.<br>Then, what if you took that after-tax amount of the distribution each year and used it to fund a life insurance policy on both your life and the life of your spouse?<br><br>I bet you weren’t expecting that one!<br><br>Life insurance? At your age? Wouldn’t that be costly?<br><br>Surprisingly, due to increasing life expectancies, life insurance pricing has dropped noticeably. As a result, planning like this becomes extremely effective.<br>The nice thing is that when the first spouse passes away, the surviving spouse receives a nice big tax-free check from the life insurance company. They can use that check to do a number of things:<br><br>-They might convert the IRAs to Roth and pay the tax from the life insurance proceeds. Then all income from the IRAs would be 100% tax-free. <br><br>-They might pull some additional income from the life insurance proceeds, again positively managing their tax return. <br><br>-If the life insurance policy is large enough, they might go ahead and give the tax toxic IRA money to the kids, and live off of the life insurance proceeds. <br><br>As we discussed, adding a large tax-free check to the list of assets that a surviving spouse has to work with can make a significant difference for them. And don’t forget, for the surviving spouse, any additional income tax DOES affect their lifestyle.<br><br>So why not think about paying some extra tax today when it has no effect on you so that your surviving spouse (or you!) can avoid taxes later when they DO affect you?<br><br>Matt Golab<br><br>Matt is an Investment Advisor Representative as well as the Chief Advisor of Aaron Matthews Financial Resources headquartered in Elk Grove, CA. <a href=”http://aaronmatthewsfinancial.com/” target=’_blank’>Simply click right here to find out a lot more about Matt Golab and his company Aaron Matthews Financial Resources!</a>

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