Is it time for another “tea party”? Well I for one am a coffee drinker so I will pass on that but I don’t like some of the hidden taxes that I have uncovered lately. Sit back and enjoy your latte and I will enlighten you.
Everyone seems to love IRA’s. There are some benefits to them but the laws keep changing and we need to be aware of those changes. As I take a sip of my coffee I need to state right here and now that I think that in a few years IRA’s with be a distant memory. I think they will be done away with within the next five to ten years, if that long. That really doesn’t matter right now. What does matter is that you understand how they are taxed.
For this example we will assume that you have gone on to that big coffee house in the sky and left an IRA valued at $1,000,000. That should be able to buy a few double lattes at your corner Starbucks. Before you ask for a double shot of vanilla in that drink, don’t forget that there are some taxes due and payable right now. We will also assume that the rest of the estate is over $2,000,000. When you add in the value of homes, other assets, and the value of a practice, it doesn’t take long to get to $2,000,000.
The estate or “death tax” as it is now called will take 45% of the amounts over $2,000,000, based on current law. That is $450,000. This leaves your heirs with a net of $550,000. Still enough to keep you in line at any Starbucks. Hold on a minute, there is more due Uncle Sam. That $550,000 is now subject to income taxes. For this exercise we will assume only 35% will go in taxes, which is $192,500. Now the net is down to $357,500.
Wow! Over $642,500 gone in taxes. 64% disappears right before you got to the front of the line. Maybe you should only order a grande coffee instead. That double latte is out of your price range now!
Did you realize that could happen? To make matters even worse, this also makes the other assets in your estate subject to a higher estate tax so that you will probably see over 45% of ALL of your assets disappear. Cheer up; at least your heirs will be able to afford a cup of “Joe” at their favorite minute market!
Did anyone explain all of that to you when they told you how great the IRA is? Did they explain ALL of the taxation while they were showing you how that IRA would save you taxes? It sounds like another case of taxation without explanation. You heard all the “good news” and none of the “bad news”. I am sorry to be the bearer of so much bad news but you really need to know these things before the fact.
Are you ready for some more bad news? This has to do with Keogh Plans. These plans came into existence is 1962 to allow self employed individuals to put away money, before taxes, for retirement for themselves and their employees. These plans became very popular during the ‘80’s and ‘90’s. Since then quite a few tax laws have been enacted that had an affect on these plans. That required the employers to update their plans to reflect these changes. The problem is that the vast majority have not kept their plans up to date and updated their documents. The IRS just loves that situation and has decided to go after these folks so that they can generate some more revenue for themselves.
If you get audited and they review your Keogh Plan and it has not been amended to reflect the changes, any contributions made to that plan are NOT tax deductible. All tax returns for the years involved must be amended and earnings for are treated as “taxable income”, and interest and penalties as well as taxes are payable and due. Another example of taxation without explanation.
Does that make the hair on the back of your neck stand up? It should but those are not the only examples of taxation with explanation. Most qualified retirement plans end up with you paying much more in taxes than you could ever save. If you have a pension, profit-sharing, 401-k, SEP, or IRA, once you retire and start withdrawing an income, you will probably pay the IRS more than ten times the taxes you saved while you were making contributions to that plan. That’s right; ten times more than the plan saved you. Did anyone ever explain that “benefit” to you? That “benefit’ is not for you; it is to “benefit” the IRS. Maybe that is why it was not covered in the sales process. That is why the IRS loves for you to set up a qualified retirement plan. It “qualifies” the IRS to get a benefit ten times greater than the taxes that you will save with a plan. Do I hear you shouting “taxation without explanation”? You should!
Stanley B. Greenfield has been engaged in the fields of Financial Management and Insurance since 1962. Mr. Greenfield is a Registered Financial Consultant, and was awarded the designation of RHU, Registered Professional Disability and Health Insurance Underwriter, in 1979, as one of its Charter Members. Mr. Greenfield has a client base that is international in scope. He has authored thousands of articles concerning tax, financial, and practice management, and has spoken throughout the world on these subjects to both business and professional associations.