Week 50
What are you doing with your money?
The stretch IRA is not a new concept or a new type of IRA on the market, but simply a wealth transfer method that allows you the ability to “stretch” your IRA over future generations. If you own an IRA, you are required to take minimum distributions from it beginning at age 70 ½. If you were to inherit someone else’s IRA, you must take minimum distributions from it based on your life expectancy regardless of your age.
The IRA is passed on based on the beneficiary designation, and typically IRA owners name their spouse as primary beneficiary with children as secondary beneficiaries. While this is the best strategy in many instances, it can sometimes require the spouse to take more taxable income than he or she really needs once he/she inherits the IRA. If income needs are not an issue for the spouse or children, it may be a great idea to name younger beneficiaries such as grandchildren. This is effective because younger beneficiaries have a much lower required minimum distribution, allowing more money to remain and grow in the account over time.
Here is an example showing the difference in required minimum distribution based on age:
Traditional IRA worth $500,000: owner passes away
If IRA is inherited by:
a)spouse: (Age 73) would have to take a minimum distribution of $20,234 in year 1
b)son: (age 55) would have to take a minimum distribution of $16,892
c)granddaughter (age 28) minimum distribution is only $9,042!
d)great grandson (age 6) minimum distribution is only $6,519!
Clearly, by stretching the IRA to future generations, it allows the money to last longer and continue to accrue interest quicker because much more remains in the account!
The IRA is passed on based on the beneficiary designation, and typically IRA owners name their spouse as primary beneficiary with children as secondary beneficiaries. While this is the best strategy in many instances, it can sometimes require the spouse to take more taxable income than he or she really needs once he/she inherits the IRA. If income needs are not an issue for the spouse or children, it may be a great idea to name younger beneficiaries such as grandchildren. This is effective because younger beneficiaries have a much lower required minimum distribution, allowing more money to remain and grow in the account over time.
Here is an example showing the difference in required minimum distribution based on age:
Traditional IRA worth $500,000: owner passes away
If IRA is inherited by:
a)spouse: (Age 73) would have to take a minimum distribution of $20,234 in year 1
b)son: (age 55) would have to take a minimum distribution of $16,892
c)granddaughter (age 28) minimum distribution is only $9,042!
d)great grandson (age 6) minimum distribution is only $6,519!
Clearly, by stretching the IRA to future generations, it allows the money to last longer and continue to accrue interest quicker because much more remains in the account!
Homework:
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O - Review your current IRA/401k’s and how your beneficiaries are designated and/or open this discussion with your parents if applicable. Be sure to consider the income needs of the current beneficiaries in determining if it makes sense to “stretch” the IRA.
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