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Article Archives: 06/02/2004

Q & A: Stretching an IRA

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 contact me at jeff@guardingyourwealth.com.

Mr. Voudrie is a Certified Financial Planner™ Professional, 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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