Tax Qualified Retirement Plans

This section discusses tax on qualified retirement plans and any additional tax on qualified plans. Qualified retirement plans seem like a good idea. But, how much tax do you have to pay on qualified retirement plans? Also, are non qualified plans tax deferred?

How much tax are Qualified Retirement Plans subject to?

You worked hard at your profession. You set money aside for retirement. You made maximum allowable, pre-tax contributions into your qualified retirement plan. With some savvy investing, and a little luck, you've managed to create quite a nest egg for yourself. In fact, you have come to the realization that between your qualified plan and your other investments, you may not need all of the income your qualified plan will produce.

So instead of liquidating your qualified plan on a systematic basis, you plan to wait until age 70 and take minimum distributions to preserve the value of the account for transfer to your heirs after you are gone.

Are qualified retirement plans a good idea when it comes to transfer of assets at death?

Most people don't realize that the qualified plan that was such a great tax shelter during lifetime may be the most difficult asset to transfer at death.

What taxes are qualified retirement plans subject to?

Qualified plans are subject to multiple levels of taxation:

Estate Taxes

Estate Taxes can reduce the size of the plan up to 50%. Income taxes are paid by the beneficiary and can be offset by a deduction for the estate taxes paid that are attributable to the qualified plan.

Income Taxes

Income Taxes can reduce the balance up to an additional 38.6%. Income taxes are paid by the beneficiary and can be offset by a deduction for the estate taxes paid that are attributable to the qualified plan.

And, if the transfer is to a grandchild ...

Generation-Skipping Transfer Tax

Generation-Skipping Transfer Tax could reduce the value of the asset even more. The generation-skipping transfer tax is a flat 50% tax that is only applied when the asset is transferring to a grandchild or other skipped generation.