Planning for retirement, which is saving and setting aside a sum of money is not just good advice, but one that is wise, and a key strategy is to grow your funds in tax-advantaged retirement accounts like IRAs (Individual Retirement Accounts). While IRAs benefit from tax-free growth, taxes apply when funds are withdrawn.

How the Tax is Collected

How Is My IRA Taxed When I am Living

When you withdraw from your IRA during your lifetime, it's taxed as ordinary income. Also, if you withdraw before 59½, there's a 10% penalty in addition to taxes. And if you don't start withdrawing by 70½, a steep 50% penalty is imposed.

What Happens When I Pass Away

Upon your passing, your IRA goes to your beneficiary. If your spouse inherits it, there are no immediate tax consequences. However, for a non-spouse beneficiary, the entire IRA is taxable, which can significantly reduce their inheritance. This type of tax is known as “Income in Respect of a Decedent.” IRAs, 401(k)s, deferred compensation plans, and other qualified plans are subject to this tax. However, depending on the size of your retirement plan, this tax (along with estate taxes) could reduce the amount passed to your beneficiary by up to 75 percent.

Charitable Gifts of IRA's

For those over 70½, a Qualified Charitable Distribution from your IRA is a tax-wise method. The funds must be directly transferred to the charity, and you can't exceed $100,000 per year. It's a straightforward way to support a cause you care about while reaping tax benefits.