Show #411 Airing Sunday 12/9/07
How would you like to turn your modest IRA or 401K into a multimillion-dollar pot of gold for your children or grandchildren? No, I'm not "stretching" the truth--it's even legal! Here to explain how to find a pot of gold in your IRA is our own legal leprechaun, and my law partner, Jennifer Peck.
Question:How can we turn a modest IRA into millions of dollars for our heirs?
Answer: Through a strategy called Super or Stretch IRA planning. To understand how this works, I'd like to give a little background.
The primary benefit of IRAs and 401(k)s is they grow income tax deferred. You do pay income tax, but only at the time you take out the funds. Until then the investments grow tax-free in your account, speeding its growth. So that you don't get too much of a good thing, Uncle Sam requires you to start dipping into your retirement funds by April 1 of the year after you reach age 70 ˝, based on your life expectancy.
At your death, your retirement funds will pass to your designated beneficiaries. Without good planning, your heirs may have to take the retirement funds out within a short time after your death, creating a hefty income tax bill.
But by setting up your IRAs and other retirement accounts properly, and naming the right beneficiaries, you should be able to allow your beneficiaries to stretch out withdrawals over their lifetimes. And this allows your IRA funds to multiply.
Question:Can you give us an example?
Answer: Say you have $125,000 in your IRA at the time you pass away. Your grandchild, age ten, is named as the beneficiary. Beginning the year following your death, the law requires him (or more accurately, a guardian for him) to start taking at least minimum distributions based on your grandchild's life expectancy (though he can take more if needed).
At age eleven (a year after your death), your grandchild has about a 72-year life expectancy. This means your grandchild would only have to take 1/72 of the total of the first year, 1/71 the second year, 1/70 the third year, and so on.
Assuming the IRA is yielding 7 percent annually, the account will grow phenomenally over the years.
If your grandchild takes only the minimum distributions each year, by age sixty-five the IRA account would have grown to more than $1,300,000. And the minimum distributions taken by your grandchild (if those distributions earn 5 percent after tax) would total about $1,700,000. In other words, you've been able to turn your $125,000 IRA into a $3 million benefit for your heir.
Question:Does this work if you name children instead of grandchildren as beneficiaries?
Answer: You may name children instead of grandchildren as beneficiaries. But since their life expectancies won't be as long, their minimum distributions will have to be higher. And that means the growth of your retirement accounts won't be as dramatic. But it's still a great benefit for kids.
Question:Can people set this up even if they're already 75 or 80?
Answer: Yes. You can set up a Super or Stretch IRA plan at any age.
Question:How do we set up a super or stretch strategy?
Answer: The best way is to create a Retirement Fund SAFE Trust. This is a specialized trust that not only lets your children or grandchildren stretch out the minimum withdrawals and grow the account. But it also allows you to provide management of the account for youngsters, and to protect the funds for your heirs if they get a divorce or when they die.
It enables you to bulletproof the inheritance against attacks by creditors or lawsuits. And it allows you to avoid an unnecessary probate when your kids die.
To set up a Retirement Fund SAFE Trust, you'll need a lawyer who is experienced in planning with retirement funds. This is not a do it yourself area.
You can turn a modest IRA into a huge benefit for your kids or grandkids. For more information, give Jennifer a call. Her number's next.
