The “hidden” IRA/401(k) estate tax

In the 1983 hit film, Trading Places, starring Dan Aykroyd and Eddie Murphy, Aykroyd’s character, Winthorpe, is haggling with a pawnshop owner over the value of the watch he is desperately trying to pawn in order to get cash.

When the pawnshop owner offers $50 dollars, Winthorpe indignantly says, “This is a Roche Vouceau. The thinnest water-resistant watch in the world. Singularly unique, sculptured in design, handcrafted in Switzerland, and water resistant to three atmospheres. It tells time simultaneously in Monte Carlo, Beverly Hills, London, Paris, Rome, and Gstaad. This is ‘THE’ sports watch of the ’80s. Six thousand, nine hundred and fifty-five dollars retail.”

The pawnshop owner says to him, “In Philadelphia, it’s worth FIFTY BUCKS!!”

The real value of an asset is how much is it worth to use it. Real estate to have access to it when you need it.

Think about it this way, which is the more important value: the gross value of your income or the net after taxes?

How about real estate? The “gross value” on the books or the net after taxes?

Most think about the value of their IRA or 401(k) as the gross value. The problem is that there is a cost to access those monies: TAXES. And the money in your IRA or 401(k) has lost the capital gains tax privilege and will be taxed at the higher income tax rates.

A one-million-dollar IRA is not worth one million dollars. Taxes can claim over one third, reducing the amount you can use to live on to less than $650,000.

Those taxes have to be paid not only by you and your spouse, but also by your children and grandchildren when you pass it to them.

It’s what we call the Hidden Estate Tax.