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Overview
• Achieve unlimited tax-free income after retirement and keep assets in the family
• Protect retirement funds from creditors, divorce, bankruptcy, lawsuits, or other problems that could expose it to loss
• Use a Roth IRA to build a tax-free fortune Slott's three-step strategy cuts through the tax laws and provides simple, easy-to-follow instructions for managing IRAs and other retirement income.
Product Details
| ISBN-13: | 9781101202883 |
|---|---|
| Publisher: | Penguin Publishing Group |
| Publication date: | 12/27/2005 |
| Sold by: | Penguin Group |
| Format: | eBook |
| Pages: | 288 |
| Sales rank: | 866,585 |
| File size: | 2 MB |
| Age Range: | 18 Years |
About the Author
Read an Excerpt
Introduction
What Comes After a Trillion?1
“If Willy Sutton were alive today, he wouldn’t be very interested in banks—because that’s not where the money is. To be specific, Willy would find about $4.5 trillion in total deposits at U.S. depository institutions, according to the Federal Reserve. But far greater assets are accumulating in retirement plans, where Americans now hold an estimated $11 trillion of wealth. For frame of reference, that’s about $2 trillion more than the total market value of all publicly traded U.S. stocks.”
—Judy Diamond, Journal of Financial Service Professionals, July 2003
The Perfect Storm
This book is based on one simple, but powerful, premise: The longer your IRA is sheltered from taxes, the more it will grow in accumulated wealth. The key to sustaining that shelter and achieving such growth is to milk the tax laws for all they are worth!
IRA exposure to taxation is unavoidable. The tax rules generally require that sheltered retirement money begin to leave its nest when the owner turns 701?2 or dies, whichever comes first. It is when IRAs are exposed to taxes during a period of transition, such as inheritance, that they become vulnerable to the most complex tax rules known (or unknown) to man.
Since exposing IRAs (including Roth IRAs) to taxation at inheritance time cannot be avoided, it is critical for IRA owners to plan for that eventuality. It is equally important that those who will be inheriting IRAs know what to do when the time arrives. If not, the consequences could be disastrous.
On the flip side, it is also when IRAs are in transition during inheritance that the opportunity presents itself to parlay them into a fortune! I call this combination of risk and opportunity the “perfect storm,” because either way the result can be a potential windfall. The question is: For whom—you, your family, or Uncle Sam?
Uncle Sam really doesn’t have to do anything to cash in—except hope that you make a mistake setting up your IRA so that the opportunity for your beneficiaries to keep it growing will be lost. Of course, even if you make no mistakes, the government still gets a second bite at the apple when your beneficiaries actually inherit—if they expose the IRA to taxes, they will sacrifice the option for continued growth. On top of all this, the taxman gets a third swipe at your IRA— because even if you make no mistakes and your beneficiaries do everything as instructed, a slipup on the part of your financial advisor, or the financial institution (bank, broker, mutual fund company) holding your IRA, can kill the chance to grow the account into a fortune by making the IRS your biggest beneficiary. Slipups of this magnitude by financial advisors and financial institutions are not only quite common, but widespread.
These are the land mines that must be successfully sidestepped so as not to trigger an explosion of taxation that costs you and your family the opportunity to parlay your retirement nest egg, no matter how small, into an obscene amount of cash over time.
IRAs in Transition
Over the next decade, the greatest transfer of wealth in American history will take place—to the tune of approximately $11 trillion in current retirement savings! By the year 2013, most of the surviving members of the World War II generation (approximately 40 million aging Americans) will have passed into history, and that generation’s accumulated life savings in IRAs and other retirement accounts will have passed to their children, the baby boomers (approximately 77.6 million Americans, according to the U.S. Census Bureau). Meanwhile, the number of baby boomers now retiring will swell to record numbers, all of them faced not only with managing the transition of their parents’ IRAs to themselves, but also with setting up their own IRAs for transition to their children.
It is critical that you, your heirs, and the financial advisor handling your affairs start preparing for the perfect storm now. Whether you are married, single, or an unmarried domestic partner, this seismic event presents a chance to build a lifetime supply of tax-deferred, in some cases even tax-free, wealth for you and your family. Or risk losing that chance—perhaps for a generation.
No Weak Links
If you read my earlier book The Retirement Savings Time Bomb...and How to Defuse It, you’ve got a leg up, because you already know the moves necessary to keep your nest egg from being gobbled up by the confiscatory taxes levied on retirement accounts when you start taking money out to live on.
Now you are ready for the slam dunk—to parlay what you’ve protected into a fortune. So there are no weak links in the chain, several key elements must be addressed to achieve this slam dunk:
1. What you can do now to parlay your IRA into a windfall during your lifetime.
2. What you must do now to ensure that your beneficiary—spouse, domestic partner, or child—has all the options available for growing your IRA into an even greater fortune after you’re gone.
3. What your beneficiary (or beneficiaries) must do at the time of inheritance to be able to take full advantage of these options.
4. How to pick a financial advisor who is an IRA expert to help you and your beneficiaries make all the right decisions.
How to Use This Book
Sidestepping just one or two land mines won’t do. You need to hurdle all of them. That’s why this book is divided into three parts, each devoted to what you must do to avoid that particular land mine. Under our current tax laws, an IRA can be turned into a windfall that will take care of you and your family for generations. This book shows you how.
My strategy for sidestepping all three land mines has evolved from more than 20 years of experience as a CPA consulting with clients on estate and tax planning, preparing tax returns, as well as being a keynote speaker, teacher, and coach to consumers and professional financial advisors. It shows you and/or your heirs how to:
n Convert your traditional IRA (or other plan) to a Roth IRA now, and achieve unlimited tax- free income when you retire.
n Name a beneficiary who can make the most of your retirement savings after you’re gone.
n Pass more assets on to loved ones and other beneficiaries.
n Keep retirement assets in the family for decades, even generations, with minimal or no taxes.
n Expand your knowledge of passing on and inheriting retirement accounts—the largest single asset most people have—and make better, more cost-efficient use of financial advisors.
n Take advantage of the latest tax laws and inherited IRA rule changes.
n Integrate your IRA with your overall estate plan to create the ideal estate plan for you and your family.
n Avoid obscure tax traps if you inherit an IRA or other retirement account.
n Protect your retirement account from creditors, divorce, bankruptcy, lawsuits, or other problems that could expose it to loss.
n Keep track of key beneficiary and other vital instruction material.
n Keep track of key IRA deadlines (missing them could be devastating).
n Use a Roth IRA to build a tax-free fortune for your family.
n See that beneficiaries do not miss out on special tax benefits, deductions, and tax elections they may not know about (because their financial advisors don’t know about them either).
n Evaluate whether an IRA trust is right for you and your family.
n Use IRA trusts to protect and grow savings for your family.
n Take advantage of the separate account rules governing IRAs when there are several beneficiaries, so that each one can independently parlay his or her share into a fortune.
n Set up your retirement account so that it allows your beneficiaries the greatest flexibility in seizing advantage of every possible post-death option available.
n And much more.
Assets for a Lifetime
This is a comprehensive, winning strategy for taking advantage of existing tax laws to parlay your IRA or other retirement account assets into a potentially tax-free fortune. No matter how large or small the account, no matter whether you are married, single, or among the millions of today’s unmarried domestic partners, this goal is attainable.
If you have worked long and hard all your life to build a nest egg and want to see it keep going and growing, this is the plan for you. It’s time to knock the ball out of the park—with a home run that takes care of you, your loved ones, and their loved ones for generations!
Part One
KEEP IT TOGETHER
Dear Ed,
I am age 73, have several IRAs, am currently taking minimum distribution, and have my beneficiaries listed to receive equal shares, which I do not think is the right thing to do. Or is it? The ages of my beneficiaries are 78, 51, 49, and 42. I need some guidance as to what would be the right way to go.
—IRA owner
One
The Ninth Wonder of the World
The Devil Is in the Details
Bill and his two siblings had inherited a $270,000 IRA from their mother, a widow when she died in 2002. Their mom had bequeathed to them equal shares of her account. Bill informed the financial institution holding the account that he and his brother and sister wanted the proceeds split three ways so that each could manage his or her own share of the inherited IRA. This is normal, since most adult beneficiaries (Bill and his siblings were in their 30s) usually don’t want the others knowing how they are investing or spending their share of the inheritance.
The advisor at the financial institution then cut three checks, one for each sibling, for $90,000 apiece. Simple as pie! Right?
Wrong!
Early in 2003, Bill went to have his 2002 taxes prepared and was told by his accountant that he owed tax on his $90,000 inheritance—$30,000 in tax, as a matter of fact!
Bill went into shock.
When he saw me quoted in a recent Wall Street Journal article on inheriting IRAs, he called me out of desperation, even though we didn’t know each other from Adam. He related his woeful tale and asked if his accountant was right. Did he really owe $30,000 in tax? I told him yes.
“But it’s worse than that,” I added. He owed not only $30,000 in tax on the $90,000 inheritance, but also state tax on it, plus tax on all his regular income (wages, interest, etc.). The $90,000 he’d taken had pushed him into a higher tax bracket, which resulted in all of his income being taxed at a higher rate than it otherwise would have been. Furthermore, due to his increased income, he lost out on many tax benefits that he would have qualified for, such as the child tax credit, medical deductions, and work-related tax deductions. Bill’s siblings were in the same boat.
Through weak links along the entire chain—their mom’s not having set the IRA up correctly, their lack of awareness as beneficiaries as to how to inherit the account properly, and the professional ignorance of the financial advisor in managing the transition of the IRA—most of what their mom had worked for was wiped out instead of having a chance to blossom.
Now Bill was experiencing awe and shock. He asked, “Is there anything that can be done to correct this?”
“No,” was my answer.
“Couldn’t I get the financial institution to put the money back in Mom’s IRA and start over the right way?”
Again my answer was no. Our tax laws do not allow that. Our tax laws are rigid, unforgiving, and draconian in this area. Once a mistake is made, it is often irreversible. In Bill’s case, all the money was removed; therefore all of it was taxable in the year it was moved, and it could not be returned. The opportunity to parlay the inheritance into a fortune was lost to Bill and his siblings for all time. Game. Set. Match.2
Astounding Growth Through Long-Term Compounding
With the blessing of the IRS (but don’t expect any government press releases coming out and saying so anytime soon), a scenario can be created where the value of any inherited IRA can grow into a fortune. The reason most people don’t create this scenario for themselves and their families is simple: They don’t know about it.
Why not? The answer to that is simple too: The tax rules are so abstruse that many financial advisors and the institutions they represent who deal with retirement accounts don’t know about it either—or shrink from offering any kind of tax advice.
If I were passing on an IRA to someone, I would want to know that I could choose that the money I had worked so long and hard for would go intact to my family, who could then parlay it into a fortune, instead of its being lost to taxes that might otherwise be avoided.
One would assume that most estate planners (as well as books on estate planning) address this issue. But they don’t. Yes, they cover how to inherit a house, stocks, insurance, and so on, because these are easy to inherit. These types of assets are not loaded with their own set of obscure tax rules.
For example, there is no law that says that when you inherit a house, the first year you can take possession of the kitchen, the second year you can take possession of the bathroom, then the third year you can take possession of the roof, then the den, and so on. Then every time you take possession of one of these items, you must pay income tax and become subject to an entire set of separate tax rules that, if not followed correctly, could lead to stiff fines rather than growth and income. If the IRA rules applied to other property like your house, for example, then after your death Uncle Sam could end up moving in, since he would already own most of the home anyway. Maybe your kids could rent the basement.
Inherited IRAs are subject to such complex tax rules. And while those rules can work against you if you do things wrong, they can also work to your benefit if you do things right— and make your family rich! And the best part is, you don’t have to start out with an IRA worth a fortune in order to achieve that goal. How so? Through the magic of the Ninth Wonder of the World—the phenomenon I call “compound interest on steroids,” otherwise known as the “stretch IRA.” Here’s how it works.
If your beneficiary inherits a $100,000 IRA from you, the value of that IRA depends on how long it stays in the hands of your beneficiary and is protected from taxation. If it is taxed immediately after your death, the IRA will have little value to your beneficiary. But if your IRA is set up properly and your beneficiary handles this inherited IRA properly, it can be worth a fortune over his or her lifetime.
The tax rules allow any person you designate as your IRA beneficiary to stretch (extend the required distributions) that IRA over his or her lifetime. The term “designated beneficiary” for tax purposes means that you have named a person (as opposed to an estate, a trust, or a charity, for example) as heir to your IRA. This is like bestowing royalty upon someone, because an inherited IRA can only be stretched over the lifetime of your designated beneficiary, whom you name as such on an IRA beneficiary form (see Chapter Five).
There can be only one designated beneficiary to an IRA. So, if you have multiple IRAs, you need to designate a beneficiary for each of them to gain the stretch for all the accounts. If you have one IRA but multiple heirs (three kids, for example), you can split the IRA among your children (or they can split it among themselves after you’re gone) so that each child can claim the title of designated beneficiary on his or her separate share of the inherited IRA and can thus stretch that share out over a long period of time. (For more on splitting IRAs, see Chapter Six.)
The stretch is based on the projected life expectancy of your designated beneficiary (or designated beneficiaries in the case of multiple IRAs) according to his or her age the year after you die. The younger the named beneficiary is, the longer the stretch. The IRS Single Life Expectancy table (see Table 1) is used to determine that period of time.
Table 1. Single Life Expectancy (for Inherited IRAs)
To be used for calculating post-death required distributions to beneficiaries
(From the April 2002 Final Regulations)
Age of Life Age of Life Age of Life
IRA or Plan Expectancy IRA or Plan Expectancy IRA or Plan Expectancy
Beneficiary (in years) Beneficiary (in years) Beneficiary (in years)
0 82.4
1 81.6 41 42.7 81 9.7
2 80.6 42 41.7 82 9.1
3 79.7 43 40.7 83 8.6
4 78.7 44 39.8 84 8.1
5 77.7 45 38.8 85 7.6
6 76.7 46 37.9 86 7.1
7 75.8 47 37.0 87 6.7
8 74.8 48 36.0 88 6.3
9 73.8 49 35.1 89 5.9
10 72.8 50 34.2 90 5.5
11 71.8 51 33.3 91 5.2
12 70.8 52 32.3 92 4.9
13 69.9 53 31.4 93 4.6
14 68.9 54 30.5 94 4.3
15 67.9 55 29.6 95 4.1
16 66.9 56 28.7 96 3.8
17 66.0 57 27.9 97 3.6
18 65.0 58 27.0 98 3.4
19 64.0 59 26.1 99 3.1
20 63.0 60 25.2 100 2.9
21 62.1 61 24.4 101 2.7
22 61.1 62 23.5 102 2.5
23 60.1 63 22.7 103 2.3
24 59.1 64 21.8 104 2.1
Table 1. Single Life Expectancy (for Inherited IRAs) (continued)
Age of Life Age of Life Age of Life
IRA or Plan Expectancy IRA or Plan Expectancy IRA or Plan Expectancy
Beneficiary (in years) Beneficiary (in years) Beneficiary (in years)
25 58.2 65 21.0 105 1.9
26 57.2 66 20.2 106 1.7
27 56.2 67 19.4 107 1.5
28 55.3 68 18.6 108 1.4
29 54.3 69 17.8 109 1.2
30 53.3 70 17.0 110 1.1
31 52.4 71 16.3 111+ 1.0
32 51.4 72 15.5
33 50.4 73 14.8
34 49.4 74 14.1
35 48.5 75 13.4
36 47.5 76 12.7
37 46.5 77 12.1
38 45.6 78 11.4
39 44.6 79 10.8
40 43.6 80 10.2
For example, if at your death your designated beneficiary is your 29-year-old daughter, she can stretch the inherited IRA over a projected life expectancy of 53.3 years, according to the Single Life Expectancy table. If you died in 2004 when she is age 29, she would then use her age in 2005 (age 30) to calculate her first required minimum distribution for that year.
She needs to use the life expectancy table only once. For each succeeding year, she just subtracts one year from the life expectancy figure. In this example, the required distribution for 2006 (her second distribution year) would be calculated using a 52.3-year life expectancy (53.3 years less 1 year = 52.3 years). For the third year the life expectancy would be 51.3 years, then 50.3 years, 49.3 years, and so on until the original 53.3-year term has expired, unless she completely withdraws the IRA before that time. She can always withdraw more than the required amount.
If she dies before the 53.3-year term has expired and there is still a balance in the IRA, then her beneficiary can continue to stretch the remaining years left on the original 53.3-year schedule. That’s why it is so important for every beneficiary to name a successor beneficiary of his or her own as soon as he or she inherits so there will be someone named to keep the stretch going on schedule if the original beneficiary dies prematurely. (This will help to avoid probate and other will-related problems that might also endanger the stretch—see Chapter Two.) There will be more on naming successor beneficiaries in Part Two.
FAQ
Q.Ed, if I have no designated beneficiary, does this mean no one will inherit my IRA?
A.Someone will get it, and it may even be the person you would have wanted. It also may not be. Either way, the huge benefit of the stretch IRA is lost, and it cannot be reclaimed after you’re gone. The Power of the Stretch—Victoria’s Millions
Let’s see in real numbers what happens if we were to milk a stretch IRA for all it’s worth. The power of the stretch IRA lies in its compounding over time. Therefore, the younger your IRA beneficiary, the longer the life expectancy, thus the longer he or she can spread out required withdrawals and compound the IRA in value. So, let’s use a 1-year-old as an example. I’ll call her Victoria.
Born in 2003, Victoria is named beneficiary of her grandfather’s IRA when he passes on later in 2003. Victoria’s life expectancy begins at age 1, the year after her grandfather’s death. According to IRS projections based on actuarial figures drawn from the Single Life Expectancy table for inherited IRAs (Table 1), the life expectancy of a 1-year-old is 81.6 years. That is her stretch period.
Let’s say the December 31, 2003, value of the IRA Victoria inherits from her grandfather is $100,000. Based on her life expectancy of 81.6 years, Victoria is required to withdraw only $1,225 ($100,000 divided by 81.6 years = $1,225, or 1.225 percent) from the IRA in 2004. The balance can keep growing tax-deferred. Because her life expectancy factor will drop by one each year, in 2005 she will have to withdraw based on 80.6 years (divide the balance by 80.6 years), then by 79.6 years in 2006, 78.6 years in 2007, 77.6 years in 2008, and so on down the line. Therefore, by taking only the required minimum distribution each year, Victoria will not have to empty the account until she is 82 years old. If we assume an average growth rate of 8 percent over her life expectancy of 81.6 years, by the time she has to empty the account, that $100,000 IRA she inherited from her grandfather would have paid her an astonishing $8,167,629 (see Table 2)!
Table 2. Victoria’s Millions
Watch 1-year-old Victoria’s inherited IRA grow at an interest rate of just 8 percent!
IRA IRA
IRA Value Life Minimum Cumulative
Beneficiary’s of Expectancy Distributions IRA
Year Age IRA Factor (in years) (RMDs) Distributions
2004 1 $100,000 81.6 $1,225 $1,225
2005 2 $106,677 80.6 $1,324 $2,549
2006 3 $113,781 79.6 $1,429 $3,978
2007 4 $121,340 78.6 $1,544 $5,522
2008 5 $129,380 77.6 $1,667 $7,189
2009 6 $137,930 76.6 $1,801 $8,990
2010 7 $147,019 75.6 $1,945 $10,935
2011 8 $156,680 74.6 $2,100 $13,035
2012 9 $166,946 73.6 $2,268 $15,303
2013 10 $177,852 72.6 $2,450 $17,753
2014 11 $189,434 71.6 $2,646 $20,399
2015 12 $201,731 70.6 $2,857 $23,256
2016 13 $214,784 69.6 $3,086 $26,342
2017 14 $228,634 68.6 $3,333 $29,675
2018 15 $243,325 67.6 $3,599 $33,274
2019 16 $258,904 66.6 $3,887 $37,161
2020 17 $275,418 65.6 $4,198 $41,359
2021 18 $292,918 64.6 $4,534 $45,893
2022 19 $311,455 63.6 $4,897 $50,790
2023 20 $331,083 62.6 $5,289 $56,079
2024 21 $351,858 61.6 $5,712 $61,791
2025 22 $373,838 60.6 $6,169 $67,960
2026 23 $397,083 59.6 $6,662 $74,622
2027 24 $421,655 58.6 $7,195 $81,817
2028 25 $447,617 57.6 $7,771 $89,588
2029 26 $475,034 56.6 $8,393 $97,981
2030 27 $503,972 55.6 $9,064 $107,045
2031 28 $534,501 54.6 $9,789 $116,834
2032 29 $566,689 53.6 $10,573 $127,407
2033 30 $600,605 52.6 $11,418 $138,825
2034 31 $636,322 51.6 $12,332 $151,157
2035 32 $673,909 50.6 $13,318 $164,475
2036 33 $713,438 49.6 $14,384 $178,859
2037 34 $754,978 48.6 $15,535 $194,394
2038 35 $798,598 47.6 $16,777 $211,171
2039 36 $844,367 46.6 $18,119 $229,290
2040 37 $892,348 45.6 $19,569 $248,859
2041 38 $942,601 44.6 $21,135 $269,994
2042 39 $995,183 43.6 $22,825 $292,819
2043 40 $1,050,147 42.6 $24,651 $317,470
2044 41 $1,107,536 41.6 $26,623 $344,093
2045 42 $1,167,386 40.6 $28,753 $372,846
2046 43 $1,229,724 39.6 $31,054 $403,900
2047 44 $1,294,564 38.6 $33,538 $437,438
2048 45 $1,361,908 37.6 $36,221 $473,659
2049 46 $1,431,742 36.6 $39,119 $512,778
2050 47 $1,504,033 35.6 $42,248 $555,026
2051 48 $1,578,728 34.6 $45,628 $600,654
2052 49 $1,655,748 33.6 $49,278 $649,932
2053 50 $1,734,988 32.6 $53,220 $703,152
2054 51 $1,816,309 31.6 $57,478 $760,630
2055 52 $1,899,537 30.6 $62,076 $822,706
2056 53 $1,984,458 29.6 $67,043 $889,749
2057 54 $2,070,808 28.6 $72,406 $962,155
2058 55 $2,158,274 27.6 $78,198 $1,040,353
2059 56 $2,246,482 26.6 $84,454 $1,124,807
2060 57 $2,334,990 25.6 $91,211 $1,216,018
2061 58 $2,423,281 24.6 $98,507 $1,314,525
2062 59 $2,510,756 23.6 $106,388 $1,420,913
2063 60 $2,596,717 22.6 $114,899 $1,535,812
2064 61 $2,680,363 21.6 $124,091 $1,659,903
2065 62 $2,760,774 20.6 $134,018 $1,793,921
2066 63 $2,836,896 19.6 $144,740 $1,938,661
2067 64 $2,907,528 18.6 $156,319 $2,094,980
2068 65 $2,971,306 17.6 $168,824 $2,263,804
2069 66 $3,026,681 16.6 $182,330 $2,446,134
2070 67 $3,071,899 15.6 $196,917 $2,643,051
2071 68 $3,104,981 14.6 $212,670 $2,855,721
2072 69 $3,123,696 13.6 $229,684 $3,085,405
2073 70 $3,125,533 12.6 $248,058 $3,333,463
2074 71 $3,107,673 11.6 $267,903 $3,601,366
2075 72 $3,066,952 10.6 $289,335 $3,890,701
2076 73 $2,999,826 9.6 $312,482 $4,203,183
2077 74 $2,902,332 8.6 $337,480 $4,540,663
2078 75 $2,770,040 7.6 $364,479 $4,905,142
2079 76 $2,598,006 6.6 $393,637 $5,298,779
2080 77 $2,380,719 5.6 $425,128 $5,723,907
2081 78 $2,112,038 4.6 $459,139 $6,183,046
2082 79 $1,785,131 3.6 $495,870 $6,678,916
2083 80 $1,392,402 2.6 $535,539 $7,214,455
2084 81 $925,412 1.6 $578,383 $7,792,838
2085 82 $374,791 0.6 $374,791 $8,167,629
2086 83 $0 0.0 $0 $8,167,629
Totals $8,167,629
Many people have IRAs worth more than $100,000 when they pass on, so I can hear what you are thinking: “If little Victoria could parlay her $100,000 IRA into $8 million what could my family do with my $200,000 (or $250,000) IRA?”
Here’s how it works, based on the bottom-line even figure of $100,000 I originally used. For a $200,000 IRA, simply multiply the $8,167,629 result by 2. For a $250,000 IRA, multiply the result by 2.5.
For example, if 1-year-old Victoria had inherited a $250,000 IRA from her grandfather in 2004, she would withdraw a total of $20,419,073 over her lifetime. How did I get that? $8,167,629 by 2.5 = $20,419,073. Think of it. If 1-year-old Victoria had inherited a $1 million IRA from her grandfather, she would receive an astounding $81,676,290 over her lifetime.
These are amazing numbers, which may not sound realistic to you, but consider this fact: The amount little Victoria begins with in each example is very realistic, because it is not unusual for people these days to have accumulated $100,000 or much more in their IRA nest eggs. By stretching withdrawals, a huge pile of cash is fully attainable for anyone with an IRA, even a modest one (see Table 3).
Table 3.
If you Then your 1-year-old beneficiary
began with: would end up with:
$3,000 $245,029
$4,000 $326,704
$10,000 $816,762
$20,000 $1,633,524
$30,000 $2,450,286
$40,000 $3,267,048
$50,000 $4,083,810
$60,000 $4,900,572
$70,000 $5,717,334
$80,000 $6,534,096
$90,000 $7,350,858
$100,000 $8,167,629
$200,000 $16,335,258
$250,000 $20,419,073
$300,000 $24,502,887
$400,000 $32,670,516
$500,000 $40,838,145
$1,000,000 $81,676,290
$1,500,000 $122,514,435
This is why the stretch IRA concept truly is the Ninth Wonder of the World.
The Heck with My Kids—
I Want to Enjoy the Money Myself!
“Ed, this is a great strategy you’ve come up with for turning my heirs into potential millionaires on my retirement money, but I want to eat filet mignon and lots and lots of carbs in the time I have left on this planet (my beneficiaries can eat cat food for all I care). What do I do now to parlay my IRA for me to enjoy?”
The starting figure I use in all my examples of what your family can parlay your IRA into when they inherit is what’s left over in your IRA after you’ve gone to your great reward having had a high old time in your retirement. (Virtually everyone leaves some amount over. I think it may be in our genes not to deplete every last nickel.) Of course I have taken your own retirement fund growth and spending into account. It’s not your job to make your beneficiaries rich. Start with yourself.
But imagine a tax-free retirement for yourself on top of leaving a tax-free inheritance that pays tax-free money to your beneficiaries every month for the rest of their lives. It doesn’t get better than that. You can achieve these goals if you begin now by parlaying your IRA first on your own behalf—and you don’t have to start with much at all to reach some pretty amazing results.
If your main concern is your own retirement needs, then it makes even more sense to grow your IRA for as long as possible before it is absolutely needed and, when that day comes, to take only the minimum amounts that you must under the regular required minimum distribution (RMD) rules. This will leave more for you.
The best way to parlay your IRA for yourself first is to convert to a Roth IRA as soon as you qualify. Here’s why:
With a Roth IRA, unlike a traditional IRA, you pay the tax up front when you contribute or convert to it, not at the back end when you start taking distributions. Why does this matter? Because after you pay the tax up front, you never pay it again; your money in the Roth keeps growing tax-free forever, and that’s what boosts your exponential return over time.
To use a farm analogy, it’s like paying tax on the seed so the crop can grow free. Remember our mantra: The longer you keep your IRA sheltered from taxes, the more money your family will accumulate. Well, that goes for you too. Don’t buy into the argument that tax-deferred is always better than tax-free. YOU SIMPLY CANNOT BEAT A ZERO PERCENT TAX RATE ON IRA WITHDRAWALS! The Roth IRA is the way to get Uncle Sam out of your wealth- building potential permanently!
Table of Contents
Introduction: What Comes After a Trillion? ixPart One: KEEP IT TOGETHER 1
1. The Ninth Wonder of the World 3
2. Your Incredibly Missing IRA Transition Strategy 25
3. Will Estate Tax and a Need for Cash
Be an Issue for You? 40
4. Setting Up Your IRA for the Stretch 52
5. Who Can—Should—Inherit Your Stretch IRA? 69
6. Setting Up a Stretch IRA for Multiple Beneficiaries 110
7. Preserving the Stretch When Naming a Trust
as Your IRA Beneficiary 120
Part Two: PARLAY IT INTO A FORTUNE 137
8. Exercising Your Options—Decisions, Decisions 139
9. Taking Inherited IRA Distributions—What to Do When 152
10. Tax-Cutting Strategies for IRA Beneficiaries 174
Part Three: CHOOSE THE RIGHT IRA ADVISOR 193
11. Why You Need an IRA Advisor 195
12. Is Your Advisor an IRA Expert? Let’s Find Out! 199
13. The Green Berets of IRAs 219
Appendices
I. Resources That Make for Top-Notch IRA Advisors 255
II. Uniform Lifetime Table and Joint Life Expectancy Tables 259
Index 285
Acknowledgments 297
About the Author 301