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Many of
you are interested in using your IRAs to generate tremendous
wealth for you and your children. My recent articles on the
topic have generated tens of thousands of hits on the
internet in just a couple weeks. In this article, I will
share responses to questions from readers that explain the
details of ‘stretching’ your IRA.
Remember, beneficiaries are not required to take all the
money out of your IRA right away. If they did, they could
lose almost half of it in taxes. Instead, they can ‘stretch’
distributions over their lifetime, allowing the remaining
money to grow tax deferred. Beneficiaries can even name
beneficiaries so the tax-deferral continues should your
beneficiaries die prematurely. This allows even modest IRAs
to grow to millions of dollars.
Q. I have $1,000,000 in my IRA. I want my children to have
the ability to continue to grow it tax-deferred. A broker is
telling me that an Equity-Indexed Annuity (EIA) is the only
way to do this. Is this true?
A. Absolutely NOT! Your children can simply ‘stretch’ your
IRA. Any IRA can be ‘stretched’ as long as a real person is
named the beneficiary (as opposed to a trust or your
estate).
Whoever told you that you would have to have an EIA to do
that was totally inaccurate and probably motivated by the
fact that they could earn $100,000 if you put a million
dollars into it! At best, they are ignorant of the facts,
and at worst they are misleading you to get you to make the
decision they want you to make.
Q. My IRA is at my local bank. They told me that when I pass
away my beneficiaries would have to liquidate the entire
account within five years. Can bank IRAs be ‘stretched’?
A. Many people and institutions are under the mistaken
impression that beneficiaries must liquidate the IRA over 5
years. It simply is not true. There is one exception: if you
died prior to beginning your required minimum distribution (RMD)
at age 70 ½ and your beneficiary wasn’t a real person (maybe
it was your estate or a trust).
Regardless of whether you die before or after beginning your
RMD, if one of your children is named as the beneficiary,
they have the ability to stretch distributions over THEIR
life expectancy.
If your bank won’t allow you to stretch an IRA on which you
are the beneficiary, find an institution that will!
Q. Can those stretching an IRA take out more than their
Required Minimum Distribution?
A. Yes, the beneficiary can take out more than their RMD if
they want to, so it is important for them to understand the
concept. Also, many financial institutions don't understand
the rules and might tell them they have to take it out over
five years AND MILLIONS COULD BE LOST. Hence it is important
that you work with an advisor who understands this issue and
can help your beneficiary navigate these waters
Q. My four children are the beneficiaries of my IRA. How
would they ‘stretch’ it when I die?
A. They have the ability to split the one IRA into 4 so that
each one of them is the sole beneficiary on their portion of
your IRA. They re-title your IRA as their inherited IRA and
put their SSN on it. (There is specific wording that should
be used—contact me for more details.)
They must start taking their required minimum distributions
based on their life expectancy. For instance, if one child
was 50 years old when you died, he/she would have to use a
factor of 34. That means they would have to withdraw 1/34th
of the value the first year, 1/33rd of the value the second
year, and so on.
Unless you have a Roth IRA, they have to pay income tax on
the amount that is withdrawn each year, while the rest grows
tax-deferred. That means that the bulk of your IRA will
continue to grow tax-deferred for decades!! The power of
compounding is huge. Even $50,000 in this scenario can grow
to millions if properly invested. If you have a Roth IRA,
all the proceeds are tax-free.
For clear, straightforward, unbiased answers to your
financial questions submit your question at
www.guardingyourwealth.com/askjeff.htm.
Mr. Voudrie is a Certified Financial Planner, nationally
syndicated newspaper columnist and President of Legacy
Planning Group, Inc., a Private Wealth Management Firm in
Johnson City, TN. He can be reached toll-free at
1-877-827-1463 or
www.guardingyourwealth.com.
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