Do you want to leave a legacy to your family and your favorite non-profit? It’s a great idea that can benefit a lot of people — even more so if you do it right in terms of taxes.
Taxes apply differently to various types of investment accounts. For example, IRAs, 401(k)s and some other types of accounts are tax deductible at the front end. They are wonderful accumulation vehicles because they allow your money to grow without being taxed. But distribution is another story. Money withdrawn from those accounts can be considered ordinary income, which incurs the highest tax.
In contrast, non-retirement plans (non-IRA accounts) don’t help you to accumulate quite as much money, because you pay taxes on dividends and capital gains as they grow. The tax benefit to these accounts comes upon your death, when their worth is calculated using a “stepped-up basis.”
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
What’s a stepped-up basis? To begin with, the IRS defines basis as "the amount of your investment in property for tax purposes. Use the basis of property to figure depreciation, amortization, depletion, and casualty losses. Also use it to figure gain or loss on the sale or other disposition of property." When using a stepped-up basis, the value of the account is not determined by the amount of money you originally paid for it, but by its worth on the date of your death.
For example, let’s say 30 years ago you bought a stock for $100, and it is now worth $100,000. If upon your death, your heirs sold it for $100,000, they would have no gain. Even though you made $99,900 on that lucky investment, since the date of death value ($100,000) is their basis, they made no profit and pay no taxes.
As you can imagine, your heirs would probably prefer to inherit non-IRA accounts, because they won’t be taxed. Qualified charities, on the other hand, don’t care which type of account you leave to them. Why? As non-profits, they won't pay taxes on any legacy you leave them.
So, if you want to leave money to your family and donate to charity, talk to a professional about willing your non-IRA taxable account to your heirs and your IRA to a non-profit, to maximize the good your financial legacy can do.
-
Risk Is On Again, Dow Jumps 381 Points: Stock Market TodayThe stock market started the week strong on signs the government shutdown could soon be over.
-
Does My Car Insurance Cover Rental Cars?Is it safe to decline the extra coverage car rental companies offer you when booking? Here's what you need to know.
-
I'm an Investment Adviser: Here's Why You Should Resist a Zero-Down MortgageWhile it's certainly enticing, a zero-down mortgage comes with significant risks, especially if home values decline or you want to refinance.
-
I'm Embarrassed to Ask: What Is a Life Insurance Trust?Life insurance trusts, particularly irrevocable life insurance trusts (ILITs), can minimize estate taxes and protect your heir's inheritance.
-
Are Your Employees Quietly Cracking? How to Repair the Cracks Before Everything BreaksSome employees who are unable to change jobs due to economic conditions are doing only the bare minimum, leading to decreased work quality and team morale.
-
Headed for the Retirement Red Zone? This Eight-Step Game Plan Helps to Avoid FumblesThese strategies help safeguard your nest egg and ensure long-term financial success during the five years before retirement and the five years after.
-
I'm a Financial Planner: This Is How You Can Get Started With RMDsThe IRS will come knocking for its share of your tax-deferred retirement savings when you hit 73, but planning ahead for RMDs will ensure you're ready.
-
How Will You Replace Your Paycheck in Retirement? A Financial Adviser's Tips on Income PlanningBills don't stop once you retire — and you can't expect your Social Security checks to cover them all. Don't risk running out of money. Instead, make a plan.
-
From Pets to Paintings: The Little Things That Can Cause Big Estate TroubleSentimental items might have little monetary value, but their disposition can cause hurt feelings. Talking about who wants what and labeling items can help.
-
The Clock Is Ticking: Take Advantage of These Retirement Tax Benefits While They LastRecent tax changes, including an extra $6,000 deduction for those 65 and older, present a golden opportunity for retirees to reduce their tax bills.
