Stretching Your IRA

Benjamin Franklin was always a curious fellow. His amazing and unstoppable curiosity made him a legend in his own time and a legend of American history. That curiosity led to the discovery of many things, his discovery of electricity by attaching a metal key to a kite being the most famous. One area of curiosity for Mr. Franklin all of his life was the amazing power of compound interest over time to create wealth. Literally putting his money where his mouth was, Franklin had one last experiment he wanted to try. At his death in 1790, his will (which I have seen online) stipulated that he was bequeathing $4000 to the city of Philadelphia with the condition that they had to leave it alone for … 200 years. In 1990, the city of Philadelphia received from the estate of Benjamin Franklin a total of … $2.2 million!

Thanks to changes in the tax treatment of inherited IRAs, that same concept of tax deferred compound growth over a long period of time can, with proper planning, be used to enhance your legacy in profound ways. Read on.

Maximizing Your IRA

If you own an Individual Retirement Account (IRA), you and your heirs can receive dramatic benefits from changes in Treasury Regulations. Regardless of your age, you can make elections that can maintain the tax deferred status of your IRA over the lives of you and your heirs. This new Multi-Generational IRA (sometimes called a “Stretch IRA”) opportunity can be worth millions of dollars to you, your spouse, children and grandchildren!

In the past the only people who were able to financially provide for and bless their children and grandchildren for multiple generations were the very wealthy. Using expensive and sophisticated trusts, they were able to accomplish what in the past was unavailable to most of us. Today, the largest investment many retirees have is often their IRA, and with the new Treasury Regulations, that single asset can be a blessing to your heirs for many years after you are gone. Albert Einstein once said that compound interest was the eighth wonder of the world. When you can utilize compound interest in a tax deferred environment like in an IRA, the results can be staggering. The Multi-Generational IRA is, I believe, the most significant planning tool available to seniors in a long, long time.

A Case Study:

Let’s walk through a typical scenario:

Assume you have participated in a Qualified Retirement Plan for the past 20 years. If you contributed $5,000 per year and compounded at an 8% return, you would have accumulated approximately $248,000.

Let’s further assume that you don’t need current income from the IRA and defer taking distributions until you are forced to start withdrawing money. The IRS requires distributions to begin in the year after the IRA owner reaches age 70 1/2. Based upon the new uniform life expectancy table, you take at least your minimum required distributions over your lifetime and, assuming an 8% compounded rate of return, you spend just over $570,000. Not only that, but the account grows to over $700,000 at the end of your life expectancy:

This is when your prior planning will benefit your heirs! There are many potential outcomes for your IRA at your death. Without proper guidance, structure, and communication, your IRA could be liquidated by your heirs, with very negative tax consequences as well as the concern that any spendthrift heirs could go through the money very quickly.

Suppose instead that you decide to spread the inheritance of the IRA over time. So rather than an accelerated distribution of this asset, you implement the Multi-Generational IRA and maintain the tax deferred status for future generations.

Let’s review this case study:
The owner transfers the IRA into the Multi-Generational IRA and divides it by beneficiary. The owner and spouse take their Minimum Required Distributions and spend over $570,000. At the first death, the surviving spouse continues taking Minimum Required Distributions over their remaining lifetime. At the second death, providing the IRA is properly structured, the children and grandchildren can take distributions over their remaining life expectancies and (in the this hypothetical example) spend in excess of $6,000,000 (minimum required distributions).

Let’s compare these two potential out-comes for your heirs:
Without proper guidance, structure and communication, your family and heirs lose. As you can see, without implementing the Multi-Generational IRA, your heirs can lose the ability to maximize the tax deferred status of the IRA. If they were to liquidate the IRA at your death, they would share an after-tax lump sum distribution of $465,000. With the assistance of a financial professional, the heirs can retain the tax deferred status of the IRA over their remaining life expectancies. Assuming minimum required distributions and an 8% rate of return, this could result in distributions in excess of Six Million dollars!

Clearly there is a tremendous opportunity available for you and your heirs if you implement the Multi-Generational IRA. But this approach does not happen by accident! You need to make specific decisions to maximize the outcome for your IRA. One service of Westport Insurance Group is to provide our clients with a detailed, computerized analysis of their IRA and how they can unlock the potential of their IRA to be a benefit and a blessing to their children and grandchildren for many years to come. Contact us if you would like assistance in deciding whether or not it would be in your best interest to implement the Multi-Generational IRA.

Important Notice: Not intended as tax, investment or legal advice. Please consult your tax, financial and legal advisors to help you determine the suitability of any financial approach for you. The discussion of this concept is purely educational and your situation may or may not make this strategy appropriate for you. All returns discussed are completely hypothetical and are in no way guaranteed. Tax rules are subject to change.