The income tax treatment of a nonqualified portfolio of investments is far superior than post-death distributions from qualified plans and retirement accounts. The reasons for this are that retirement benefits do not receive a step-up in income tax basis at the owner’s death, retirement benefits must be distributed post-death, and retirement benefits are taxed as ordinary income tax. One option for minimizing this post-death income tax treatment is to withdrawal only the RMDs during the owner’s lifetime, which allows a smaller percentage of accumulated wealth to be subject to the full basis step-up at death. Another option is to convert a portion of the IRA to a Roth IRA, allowing for lower income tax rate on the withdrawals and more accumulation in the Roth. Lastly, an additional option would be to take small IRA distributions and invest the after-tax amount into life insurance.
See James G. Blase, Does a Stretch IRA Always Make Financial Sense?, Wealth Management, June 24, 2016.
Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.
