| All rights reserved. |
| Owned and operated by: Click here to go to our Company website |
 | |  | |  | |  | |  |
| Investment Advisory Services provided by Diversified Estate Services, LLC, a Registered Investment Advisor |
| There are two systems of taxation in this country... One for the, informed, and one for the uninformed. Supreme Court Justice Learned Hand |
What You Need To Know Now About IRAs and Your
Estate
History of Individual Retirement Accounts (IRAs)
The individual retirement account was made possible by changes in the tax
laws enacted by President Ford in 1974. This original IRA allowed an income
tax deduction for amounts placed into it, and all interest earned in the account
grows tax-deferred. Upon withdrawal of these funds the distributions are
considered taxable income to the owner during their life, or the beneficiary upon
inheritance.
Over time, variations of the IRA emerged. One of these is the "non-deductible"
IRA. With this account, owners can make a contribution to the account and earn
tax-deferred interest, but none of the contributions are tax deductible. The
benefit is that the growth of the account is not taxable until withdrawn.
In 1997 the next variation of IRA developed was the Roth IRA. With this account
participants can make a contribution to a personal retirement account and all of
the interest earned could be withdrawn tax-free at retirement. In addition there
is no mandatory withdrawal required of the Roth IRA other than at death. With a
Roth IRA there is no deduction allowed when contributions are made because
it is funded with after-tax dollars.
Estate
History of Individual Retirement Accounts (IRAs)
The individual retirement account was made possible by changes in the tax
laws enacted by President Ford in 1974. This original IRA allowed an income
tax deduction for amounts placed into it, and all interest earned in the account
grows tax-deferred. Upon withdrawal of these funds the distributions are
considered taxable income to the owner during their life, or the beneficiary upon
inheritance.
Over time, variations of the IRA emerged. One of these is the "non-deductible"
IRA. With this account, owners can make a contribution to the account and earn
tax-deferred interest, but none of the contributions are tax deductible. The
benefit is that the growth of the account is not taxable until withdrawn.
In 1997 the next variation of IRA developed was the Roth IRA. With this account
participants can make a contribution to a personal retirement account and all of
the interest earned could be withdrawn tax-free at retirement. In addition there
is no mandatory withdrawal required of the Roth IRA other than at death. With a
Roth IRA there is no deduction allowed when contributions are made because
it is funded with after-tax dollars.
As the need for retirement savings increased, plans called for 401 (a), 401(k), 457, SEP IRA and others were created allowing
individuals to grow their retirement savings only tax-deferred basis. All of the above plans represent taxable consequences to the
beneficiaries with the exception of the Roth IRA, which is income tax-free to both the owner and their heirs upon withdrawal.
What is a "Stretch" IRA . . .
When an IRA passes to the next generation, it is the beneficiary who is responsible for the taxes due on the inheritance. IRAs and
retirement accounts have a different set of tax rules than real estate, savings accounts or even stocks.
IRA inheritance income taxes are generally a surprise, as most families have never discussed the matter openly. In fact many IRA
owners are not even aware of the fact that they are leaving a tax bill to their heirs.
When the IRA inheritance is withdrawn immediately after receipt, the taxes can create immediate catastrophic losses in wealth. The
receipt of this income can also compound their personal taxes by pushing them into a higher tax bracket on all their other household
income. It is not uncommon to see up to 50% or more of an inherited IRA immediately be handed over to the government in taxes.
Needless to say this is not the way most IRA owners would like to see their life savings be squandered away.
Today a beneficiary can use the tax laws to avoid liquidating the account and can continue the tax-deferred compounding of these
accounts over their lives. The only requirement is that a required minimum distribution (RMD) be made once each year. When this
method is applied, the financial possibilities of this are considerable. This is known as the stretch IRA method.
The continued tax-deferred compounding of the inherited IRA, allows a beneficiary to turn their inheritance into a substantial legacy of
income relevant to their life expectancy. An IRS table is used to calculate life expectancies for IRA beneficiaries. A copy of this table is
found in the “Settlement Instructions” section of this planner. When younger beneficiaries are named the financial possibilities are
quite substantial. The next section illustrates these possibilities.
Turning A Ordinary Inheritance Into A Real Legacy Using The Stretch IRA
It has been said that compound interest is the eighth wonder of the world. The ability to compound money tax-deferred is a key reason
that trillions of dollars sit in IRAs today. By inheriting an IRA as a stretch IRA, beneficiaries can inherit an opportunity to perpetuate that
well tax-deferred over their lives and create a substantial legacy of income for themselves and their families.
Let's take a look at an example: Susan is 45 years old and has just inherited her father's $290,000 IRA. She is in a 25% marginal tax
bracket before she inherits the IRA. Susan is currently in her working years and is accumulating assets for retirement. She also has
children who are entering college and has a need for additional income to pay for college. Susan is also looking to fulfill her retirement
income needs.
If Susan takes a full distribution of IRA account, several events occur. She will no longer be in the 25% tax bracket, as the distribution
will push her into the 35% tax bracket. She will immediately lose $97,353 of the $290,000. This $97,353 and the earnings she could
have created with it over her lifetime are lost forever. At Susan's age, she also loses the inheritance of a tax-deferred account she can
withdraw money out of at any time without incurring a Federal Excise Tax Penalty. This is something she cannot do with her own IRA
accounts.
However, if Susan inherits her father's IRA as a stretch IRA, she will retain control over the entire IRA balance thereby avoiding the
surrender of a lump sum distribution to the IRS. Susan will be required to make an annual distribution from the account once each year
and her first year distribution will be $8,187 based on the $290,000 value and her age. In her current marginal bracket, the taxes on
that $8,187 would be $2,046. After Susan's children have finished college, she decides to buy a second home for retirement using the
income from the required minimum distributions. Because she takes an income tax deduction on the mortgage, Susan is able to
effectively avoid taxes on a portion of the IRA distributions as they are negated by her income tax deduction. The net effect of this is that
Susan is getting the IRS to pay for a portion of the mortgage.
If Susan earns a 7% return and lives until age 81, the sum total distributions over her lifetime will equal $1,572,236.
Susan's Inherited IRA Illustrated...
The following table illustrates what Susan's minimum distributions could be each year beginning with the year after her father's death.
She begins her first distribution at age 46 and finishes the distributions at age 81. The chart shows only the minimum required
distributions although Susan can always withdrawal more if she needs extra income. A new 7% interest rate is assumed in this
illustration. Rates of return over her lifetime could be more or less depending upon the underlying investments within the inherited IRA.
The account balance column illustrates the yearly value of the account after interest is credited and the minimum required distribution
takes place. Notice how the account value increases steadily until she is age 70. At that time the required minimum distributions
exceeds the amount of income the account is earning.
Distributions for the account steadily increase until age 81.
individuals to grow their retirement savings only tax-deferred basis. All of the above plans represent taxable consequences to the
beneficiaries with the exception of the Roth IRA, which is income tax-free to both the owner and their heirs upon withdrawal.
What is a "Stretch" IRA . . .
When an IRA passes to the next generation, it is the beneficiary who is responsible for the taxes due on the inheritance. IRAs and
retirement accounts have a different set of tax rules than real estate, savings accounts or even stocks.
IRA inheritance income taxes are generally a surprise, as most families have never discussed the matter openly. In fact many IRA
owners are not even aware of the fact that they are leaving a tax bill to their heirs.
When the IRA inheritance is withdrawn immediately after receipt, the taxes can create immediate catastrophic losses in wealth. The
receipt of this income can also compound their personal taxes by pushing them into a higher tax bracket on all their other household
income. It is not uncommon to see up to 50% or more of an inherited IRA immediately be handed over to the government in taxes.
Needless to say this is not the way most IRA owners would like to see their life savings be squandered away.
Today a beneficiary can use the tax laws to avoid liquidating the account and can continue the tax-deferred compounding of these
accounts over their lives. The only requirement is that a required minimum distribution (RMD) be made once each year. When this
method is applied, the financial possibilities of this are considerable. This is known as the stretch IRA method.
The continued tax-deferred compounding of the inherited IRA, allows a beneficiary to turn their inheritance into a substantial legacy of
income relevant to their life expectancy. An IRS table is used to calculate life expectancies for IRA beneficiaries. A copy of this table is
found in the “Settlement Instructions” section of this planner. When younger beneficiaries are named the financial possibilities are
quite substantial. The next section illustrates these possibilities.
Turning A Ordinary Inheritance Into A Real Legacy Using The Stretch IRA
It has been said that compound interest is the eighth wonder of the world. The ability to compound money tax-deferred is a key reason
that trillions of dollars sit in IRAs today. By inheriting an IRA as a stretch IRA, beneficiaries can inherit an opportunity to perpetuate that
well tax-deferred over their lives and create a substantial legacy of income for themselves and their families.
Let's take a look at an example: Susan is 45 years old and has just inherited her father's $290,000 IRA. She is in a 25% marginal tax
bracket before she inherits the IRA. Susan is currently in her working years and is accumulating assets for retirement. She also has
children who are entering college and has a need for additional income to pay for college. Susan is also looking to fulfill her retirement
income needs.
If Susan takes a full distribution of IRA account, several events occur. She will no longer be in the 25% tax bracket, as the distribution
will push her into the 35% tax bracket. She will immediately lose $97,353 of the $290,000. This $97,353 and the earnings she could
have created with it over her lifetime are lost forever. At Susan's age, she also loses the inheritance of a tax-deferred account she can
withdraw money out of at any time without incurring a Federal Excise Tax Penalty. This is something she cannot do with her own IRA
accounts.
However, if Susan inherits her father's IRA as a stretch IRA, she will retain control over the entire IRA balance thereby avoiding the
surrender of a lump sum distribution to the IRS. Susan will be required to make an annual distribution from the account once each year
and her first year distribution will be $8,187 based on the $290,000 value and her age. In her current marginal bracket, the taxes on
that $8,187 would be $2,046. After Susan's children have finished college, she decides to buy a second home for retirement using the
income from the required minimum distributions. Because she takes an income tax deduction on the mortgage, Susan is able to
effectively avoid taxes on a portion of the IRA distributions as they are negated by her income tax deduction. The net effect of this is that
Susan is getting the IRS to pay for a portion of the mortgage.
If Susan earns a 7% return and lives until age 81, the sum total distributions over her lifetime will equal $1,572,236.
Susan's Inherited IRA Illustrated...
The following table illustrates what Susan's minimum distributions could be each year beginning with the year after her father's death.
She begins her first distribution at age 46 and finishes the distributions at age 81. The chart shows only the minimum required
distributions although Susan can always withdrawal more if she needs extra income. A new 7% interest rate is assumed in this
illustration. Rates of return over her lifetime could be more or less depending upon the underlying investments within the inherited IRA.
The account balance column illustrates the yearly value of the account after interest is credited and the minimum required distribution
takes place. Notice how the account value increases steadily until she is age 70. At that time the required minimum distributions
exceeds the amount of income the account is earning.
Distributions for the account steadily increase until age 81.
| For more information for your personal planning, fill out the form below and Rick or Radon will be glad to contact you. |