New and Powerful Opportunities to Plan with IRAs
The primary benefit of an IRA is its internal tax-deferred growth. The longer the taxpayer is able to stretchout this tax-free growth, the greater the benefit. Required minimum distributions (RMDs) from IRAs start the year after the taxpayer attains age 70½ and are based on the taxpayer’s life expectancy.
After the taxpayer’s death, with careful planning, IRAs, then known as inherited IRAs, can then be distributed based upon the life expectancy of the beneficiary. We call this IRA Stretchout. Note, the IRS reports that on average an IRA is withdrawn within six months of its being inherited – so much for tax-deferred growth. The quicker the Inherited IRA is liquidated, the less economic benefit is passed to the beneficiary. he difference can be millions of dollars of increased benefits!
The ability to compound IRAs, and now other qualified plans, income tax free, over a much longer period in time make these assets very valuable when passing wealth down from generation to generation. For example, a $200,000 IRA, inherited by a 50 year old, could be worth $1.5 million or more over his and his children’s lifetimes!
Until recently, the desire to stretch IRA payments created issues and conflicts with other client planning objectives since clients were unable to control the beneficiary’s rights to take distributions from the inherited IRA.
How many beneficiaries will limit themselves to their
RMDs over their lifetimes? The individual beneficiary may at any time decide
to take out more than the tax laws require because the beneficiary is not
aware of the tax rules and choices he has, or the beneficiary gets bad
advice, or the beneficiary simply wants to spend money (or the spouse or
another party influences the beneficiary to spend it), and thereby causes
taxation to occur much earlier, loses years of tax free compounding, and
essentially blows the stretchout. The beneficiary may also be too young or
disabled to manage money, and a beneficiary receiving government benefits
could lose them. Many clients are concerned about Divorce Protection,
Creditor Protection, and Bankruptcy Protection for their loved ones.
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