Individual Retirement Accounts (IRAs)
Qualified (Tax Deferred) Retirement Accounts

With over 31 million investors and $2 trillion in assets Individual Retirement Accounts have developed into a key component of financial plans for millions of Americans and a major presence in the retirement savings landscape.

"IRAs were truly the financial device that brought home the realization that the American middle class was going to have to take control of its own financial future," wrote John Nocera in his best selling book A Piece of the Action: How the Middle Class Joined the Money Class.

Funds accumulated in an IRA or other qualified (tax deferred) retirement plans, however, carry a significant tax burden for heirs. They must pay income tax at their prevailing rate on any funds they withdraw. The "tax time-bomb" can be magnified if the accumulations in tax-deffered accounts also push your estate over the exclusion limit ($2,000,000 in 2008) making your entire estate subject to estate taxes that begin at 37% and rise to 50%.

New IRA distribution rules issued by the IRA in early January 2001, and effective immediately, put some new twists into estate planning.

Under the old complex distribution rules, if you were planning bequests to charities, it was "gospel" to give the IRA funds to the charities and leave lower tax liability assets to your heirs.

Under the new rules this is still true -- sometimes. The deciding factor should be the ages of your planned beneficiaries. If older and likely to "cash out" the inheritance and be subject to income taxes, it is still a good idea to give IRA funds to charities and other lower tax liability assets to them. But , and this is a big but, if the planned heirs will be younger -- grandchildren, for example, the best strategy may be to give them the IRA funds. Why? Under the new rules the age of the beneficiaries dictate the distribution schedule. Younger IRA heirs could enjoy the benefits of tax-defferred accumulations for many years to come.