Posted on July 27, 2006 at 17:20:08:
For most people, an IRA or a 401(k) is a first-class retirement savings tool with real tax-deferment advantages. When they retire, they use the money to live on – or to live better than Social Security would allow.
First-class is fine; it’s when the IRA gets into luxury territory that owners run into trouble. When there’s a lot in the IRA and lost of other fund, too – enough to trigger estate taxes – the IRA can be subject to double taxation: estate tax and then income tax, too. (Add in, also, state income and estate taxes.)
One way to cut down on this double taxation is to use retirement-account cash to fund life insurance to be owned by an irrevocable trust. (Consider an immediate-payment annuity to fund it.) The insurance proceeds are not part of your estate (as long as you didn’t own the policy), and heirs won’t owe income tax on it.