A million dollar retirement account sounds like a significant sum. If something tragic were to happen, a retirement account of this size would seem to financially care for it’s beneficiaries for a long time. However, studies have shown that a typical inheritance is spent within 17 months.
For a qualified retirement account with upwards of a million dollars this is a catastrophe — withdrawals will be taxed at the highest marginal income tax rates — as much as 50% when including state income tax — and the loss of tax free growth and creditor protection is irretrievably lost. A million dollar account shrinks in half before it benefits any real person.
Qualified retirement accounts — IRA’s, 401k’s, 403(b) and Roth IRA accounts — require years of conscientious contributions to build a significant balance. Typically these retirement accounts are built over a career and intended to fund a long retirement. In the event of the death of an account owner, this careful saving may evaporate without prior planning. Poor decisions by an account beneficiary could destroy the account value through withdrawals and the income taxes that are due on those withdrawals. Accounts that were built with diligent saving may dwindle within a short amount of time. Liquidation of qualified retirement accounts comes at a high tax cost with a loss of the tax-free status of the fund. Creditor protection afforded retirement accounts in most states is also lost when an account is in a spent-down. Good prior planning by the retirement account holder will avoid these unfortunate results.
Successful Planning for Retirement with Withdrawals
A much better result — and the result most account owners desire, even if they have not established a solid plan to ensure it occurs — is moderate withdrawals from a retirement account over a long period of time. This allows the account balance to grow free of taxes, maintains state creditor protection, and allows the beneficiary a long period of financial support at a lower marginal tax rate — win, win, win results.
A retirement account owner must do some planning to lock in these positive results — either by establishing a trust for the retirement account benefits or placing the funds in a trusteed IRA account. Both of theses solutions will protect a million dollar retirement account from the disastrous results of a lump some liquidation.
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