Presentation on theme: "How to “Stretch” Your IRA"— Presentation transcript:
1 How to “Stretch” Your IRA Today we are going to discuss ways to stretch your IRA. In the next 15 minutes, we’ll cover:• Stretch IRA basics• Steps that you can take to stretch your IRA• Whether a stretch IRA is right for you• How to get started to stretch your IRA
2 Value Time “Stretch” IRA basics Q: What Is a “Stretch” IRA? A: A Strategy to Extend the Life of Your IRAThe “Stretch” IRA is not a type of IRA. It’s a distribution strategy that you can set up for a Traditional, Rollover or Roth IRA. It extends tax-deferred growth potential on Traditional or Rollover IRAs, and it provides an extended stream of tax-free income on Roth IRAs.The key step in stretching an IRA is to name beneficiaries who are young and who can receive income over a long period of time after the death of an IRA owner or the IRA owner’s spouse.The key advantage of a Stretch IRA is that IRA assets have the potential to continue to grow tax-deferred over the period during which distributions are being made to beneficiaries.ValueTime
3 Is a “stretch” IRA right for you? Q: Will You Need Your IRA to Generate Income in Your Lifetime?Your AnswerYour StrategyYesNo “stretch”My spouse will needDelay “stretch”NoConsider “stretch”Before you consider a stretch strategy for your IRA, ask yourself these questions:Number One: Will you need your IRA to generate income in your lifetime?• If you and your spouse will rely on your IRAs for retirement income, a stretch strategy may not make sense for you.• If your spouse may need your IRA for income after you are gone, you should name your spouse as beneficiary and implement a stretch strategy by naming a young beneficiary for any remaining assets.• If neither you nor your spouse are likely to need your IRA, a stretch strategy may be right for you.
4 Is a “stretch” IRA right for you? Q: Do You Have Young Beneficiaries Who Could Benefit From a “Stretch” Strategy?Your AnswerYour StrategyYesConsider “stretch”NoConsider charitable givingNumber two: Do you have young beneficiaries who could benefit from a lifetime of potentially increasing income--young children or grandchildren or family members with special needs?• If the answer is yes, consider a strategy that can help them stretch income over their own life expectancies.• If the answer is no, consider bequeathing your IRA to a charitable cause or alma mater. A nonprofit that inherits an IRA is exempt from federal and state income tax.Keep in mind that an IRA owner may change beneficiaries at any time.
5 Benefits of a “Stretch” IRA 1. Extend the life of your IRA over your beneficiary’s2. Maximize potential tax-deferred growth3. Create a legacy for your heirsA Stretch IRA has three main benefits: It can help you:• extend the life of your IRA to provide income for your spouse, children or grandchildren• maximize potential tax-deferred growth of your IRA assets•provide income for your heirs (tax-free with a Stretch Roth IRA)
6 5 steps to maximize a “Stretch” IRA 1. Start early to accumulate assets2. Delay income distributions in retirement3. Take only minimum distributions once age 70½4. Name designated beneficiaries5. “Stretch” big with a Roth IRA conversionIt takes planning to position yourself to effectively leave a stretch IRA for your heirs.. Here are five steps that can help you maximize the potential benefits of a Stretch IRA.
7 Start earlyContributions Compound Over Time – Ending Value of Maximum Annual IRA Contributions*The foundation for a Stretch IRA begins during your working years.• As you can see by the chart on this slide, you can accumulate more than $1 million in an IRA, earning 7% annually, if you start early and contribute every year. Double that to $2 million if both you and your spouse contributed and earned 7% annually.• Contribute the maximum to an IRA each year—even if you don’t think you will need to save additional money for retirement.• Remember that your spouse can contribute to an IRA even if he or she does not work outside the home.* The maximum allowable contribution for individuals under age 50 is $5,500 per year, and $6,500 per year for those age 50 and older.Source: BlackRock. The example is hypothetical and does not represent any particular investment. Assumes 7% annual return.
8 Delay income distributions Distributions Can Prematurely Deplete Savings – Impact of Delaying Distributions to Age 70½$210,485Although you will be eligible to take penalty-free withdrawals from your IRA after age 59 1/2, it’s a good idea to delay distributions from your IRA as long as you can.Look at the difference it can make to your total wealth accumulation as shown on this chart.The bottom line shows the impact of 5% annual distributions beginning at age 59 1/2. The starting value of the IRA was $100,000. After 11 years of withdrawals and an average annual compound return of 7%, the ending value is $102,393.The top line shows the impact of delaying distributions to age 70 1/2. After 11 years and a 7% average annual return, this $100,000 account is worth more than double its starting value or $210,485.$102,393Source: BlackRock. Assumes compounded annual return of 7%. 5% inflation-adjusted withdrawals based on beginning balance of each year. This example is hypothetical and does not represent any particular investment. May not represent the required minimum distribution after age 70½.
9 Take minimum distributions Distributions Can Have a Large Impact Over Time$128,656• After you reach age 70½, you will be required to take minimum distributions from your Traditional IRAs—even if you are still working.• Minimum distributions are determined by an IRS formula based on your life expectancy. If there is a significant difference in age between you and your spouse, that can also be a factor.• If you take minimum distributions—and no more—look at how much larger the value of your IRA is after 15 years. This chart shows the difference between 6% annual distributions and minimum distributions. If you keep your distributions to the minimum you’re required to take, you have the potential to accumulate significantly more for future generations.$95,744Source: BlackRock. Assumes starting balance of $100,000 and compounded annual return of 7% over 15 years. Withdrawals are calculated using the balance at the beginning of the year. Required minimum distributions are calculated using the Uniform Lifetime Table. This example is hypothetical and does not represent any particular investment.
10 Name beneficiaries to maximize “stretch” Comparing Total Distribution to Stretch“Shrink”“Stretch”IRA with estate as beneficiaryHeirs choose to distribute all assets in a lump sumIRA with 10-year-old grandchild named as beneficiaryAssets distributed over grandchild’s lifetime (72 years)Value of inherited IRA $250,000Income Tax (28%) -$70,000Total to Heirs $180,000Total Lifetime Distributions $7,368,775Income Tax (28%) -$2,063,257Total to Heirs $5,305,518(over 82-year life expectancy)This may be the most important slide in this presentation.It demonstrates the ultimate stretch IRA.If you leave your $250,000 IRA to your estate, its value after income tax is paid is $180,000.If you leave the same IRA to a 10-year old grandchild, the child can stretch the income over 82 years of life expectancy. After paying taxes, the total lifetime value of the IRA distributions is more than $5 million.The message? It is essential to name a beneficiary if you want your IRA to be distributed in an optimal way. Name young beneficiaries to really stretch your IRA.This example illustrates the benefit of naming an individual beneficiary rather than an estate. The value of the inheritance is $250,000. All examples assume 7% annual investment return. This example takes into account the effects of 28% income tax on distributions, but does not take any estate tax into account. This example assumes the IRA owner designated the beneficiary before the required beginning date and the first required minimum distribution was taken on or before December 31 of the year following the IRA owner’s death using the life expectancy method. For illustration only; results shown are not intended to represent the performance of any investment. Actual results may vary. Please keep in mind that possible changes in income tax rates, the impact of inflation and other risks may cause this investment to be less advantageous in the future.
11 Name beneficiaries to maximize “stretch” Beneficiary designations must satisfy the following for a “stretch” to be allowed:All named beneficiaries must be individuals*Individual must be a beneficiary as of the date of the owner’s deathIndividual must remain a beneficiary as of September 30 of the year following the owner’s deathIt’s very important if we are discussing a stretch IRA, to understand that we must designate our beneficiaries in such a way that they are afforded the opportunity to take RMDs over their life expectancy. In order for a beneficiary to “stretch” the IRA, the following conditions must be met:All named beneficiaries must be individuals*Individual must be a beneficiary as of the date of the owner’s deathIndividual must remain a beneficiary as of September 30 of the year following the owner’s deathIt is very important if you are naming your estate as a beneficiary that you understand the cost to do that with respect to the stretch. If the estate is the named beneficiary, your heirs will not be given the opportunity to “stretch” over their life expectancy. In many circumstances they will be required to distribute all of the money by the end of the fifth year following your death.Accounts where the beneficiary is not an individual, such as an organization or the estate, will be treated as having no designated beneficiary and have to take lump sum distributions.* Exceptions apply for certain trusts.* Exceptions apply for certain trusts.
12 Can a trust “stretch” an IRA? Yes, provided the following conditions are met:The trust is valid under state lawThe trust must be irrevocable or become irrevocable upon the owner’s deathCertain documentation regarding the trust beneficiaries is provided to the plan administrator or custodian by October 31 of the year following the owner’s deathThe trust’s beneficiaries must be clearly identifiableAll beneficiaries must be individualsIf you are naming your trust as the beneficiary on your IRA, the trust must meet the above conditions in order for any stretch to occur on the beneficiary’s life expectancy. If the five conditions are satisfied, your trust will qualify for see through provisions and you can base a stretch on the oldest trust beneficiary’s life expectancy. This could be a disadvantage if you have several beneficiaries and there are considerable age differences between them. You may want to consider alternative designations where possible.
13 Oldest trust beneficiary will determine the “stretch” period John Smith’s Living Trust BeneficiariesWifeAge 6550%Children from previous marriageJohnAge 4025%JaneAge 35If you named a trust as your beneficiary and your surviving spouse was named to receive ½ of the asset through your trust, and children from a previous marriage were receiving the other ½, than you could look into the trust and look at the wife’s life expectancy, as the oldest trust beneficiary, and use that to determine what the stretch period will be. In this example, the trust would be able to stretch distributions over a 21 year period.Account can be stretched over a 21-year period.** Based on the single life expectancy table found in IRS Publication 590. For illustrative purposes only.
14 Alternative to trust as beneficiary Primary beneficiaryWife: 50%John Smith: 25%Jane Smith: 25%Contingent beneficiaryJohn Smith’s Living TrustTrust BeneficiariesWifeAge 6550%Children from previous marriageJohnAge 4025%JaneAge 35When you can, you may want to consider naming beneficiaries by name when dealing with qualified assets and naming the trust as contingent beneficiary. By naming the individuals in the previous scenario outright, you allow the children to stretch their interest over their own life expectancy. They more than doubled the stretch period. Additionally, the wife will now have the opportunity to roll her portion into an IRA for herself and defer distributions until she is 70 ½. She can then name her own beneficiaries to inherit the money and then stretch over their life expectancy.Account can be stretched over 21, 43.6, and 48.5 years respectively.** Based on the single life expectancy table found in IRS Publication 590. For illustrative purposes only.
15 Minors as beneficiaries If a minor inherits property, court intervention is commonly required to determine who can act on behalf of the minor.Consider using the following alternatives:A trustThe Uniform Transfer to Minors Act (UTMA)John Smith C/FJane Smith – UTMA – ILIf you are considering naming a minor child or grandchild as your primary or contingent beneficiary, you should consider alternatives to naming the child outright. If a minor inherits money, court intervention is typically required, so the asset is essentially frozen until the courts document who can act on behalf of the minor. This can become very timely and costly. Not to mention, when court intervention is involved, there is commonly an on going requirement of an accounting back to the court with respect to the asset.In the absence of a trust, consider using the Uniform Transfer to Minors Act. This act allows the transfer of money to occur at death and is therefore a valid beneficiary designation. Decide who you would like to control the asset on behalf of the minor until they reach the age of majority. Keep in mind you have the ability to change this individual up until the asset is transferred at your death. Simply indicate the custodian you would like followed by the minors name, UTMA and the state whose act you are adopting.John Smith Custodian for (C/F)Jane Smith – UTMA – IL.So if the child inherits the asset, proof of age is requested. If the child is under the age of majority the custodian has immediate access and control on behalf of the child. If the child is over the age of majority, the child has immediate access and control over the asset.
16 Default designationsIt is important to know the default designations on your account. Traditional designations pass interest to surviving primary beneficiaries first.Primary beneficiaryContingent beneficiaryJohn Smith (Owner)Karen (Daughter) 33.3%Doug (Grandson)Ryan (Grandson)Brittney (Granddaughter)Brendan (Grandson)Alex (Grandson)Barbara (Daughter)33.3%John (Son) 33.3%It is also very important that we know mechanically how our beneficiary designations work on all of our assets and we don’t make assumptions. Let’s consider the following scenario. You have a father naming his 3 children all as primary beneficiaries in equal shares. He also has grandchildren from each. In most designations, if one of the primary beneficiaries predeceased him or disclaimed their interest, there share would go to the other primary beneficiaries.
17 Default designationsIt is important to know the default designations on your account. Traditional designations pass interest to surviving primary beneficiaries first.Primary beneficiaryContingent beneficiaryJohn Smith (Owner)Karen (Daughter) 50%Doug (Grandson)Ryan (Grandson)Brittney (Granddaughter)Brendan (Grandson)Alex (Grandson)Barbara (Daughter)50%John (Son) 33.3%All primary beneficiaries would generally have to be out of the equation before any contingent beneficiary receives anything.In most designations, if one of the primary beneficiaries predeceased him or disclaimed their interest, their share would go to the other primary beneficiaries.TraditionalTraditional
18 Default designationsIt is important to know the default designations on your account. Traditional designations pass interest to surviving primary beneficiaries first.Primary beneficiaryContingent beneficiaryJohn Smith (Owner)Karen (Daughter) 33.3%Doug (Grandson)Ryan (Grandson)Brittney (Granddaughter)Brendan (Grandson)Alex (Grandson)Barbara (Daughter)33.3%John (Son) 33.3%This means you could be unintentionally disinheriting part of your family.TraditionalTraditional
19 Per Stirpes designation If a primary beneficiary is deceased or disclaims, his or her interest is split equally among his or her heirs. Children by representation is utilized as an alternative in some states.Primary beneficiaryHeirs of primary beneficiaryJohn Smith (Owner)Karen (Daughter) 33.3%Doug (Grandson)Ryan (Grandson)Brittney (Granddaughter)Brendan (Grandson)Alex (Grandson)Barbara (Daughter)33.3%John (Son) 33.3%You may want to consider customizing your designation to include Per Stirpes.Per stirpes
20 Per Stirpes designation If a primary beneficiary is deceased or disclaims, his or her interest is split equally among his or her heirs. Children by representation is utilized as an alternative in some states.Primary beneficiaryHeirs of primary beneficiaryJohn Smith (Owner)Karen (Daughter) 33.3%Doug (Grandson)Ryan (Grandson)Brittney (Granddaughter)Brendan (Grandson) 16.65%Alex (Grandson) 16.65%Barbara (Daughter)33.3%John (Son)This way, if one of your primary beneficiaries disclaims or predeceases you, their interest would go to their children, not the other primary beneficiaries. This may be more in line with your goals.Per stirpes
21 “Stretch” big with a Roth IRA conversion To Convert or Not to Convert a $1,000,000 Traditional IRATraditional IRARoth IRA Conversion13.68**• When you convert your IRA to a Roth IRA, you will owe federal and state income tax on the amount of the conversion.• For this strategy to make sense, you should be able to pay the taxes out of your taxable savings.• This can be a smart move because it will 1) reduce the amount of your taxable estate and 2) create a lifetime of tax-free income for your heirs.• Unlike traditional IRAs, you will never be required to take distributions of any amount from a Roth IRA in your lifetime.• Your heirs will be required to take minimum distributions based on their life expectancies.Traditional IRARoth IRATaxable accountAssumptionsNo withdrawals other than RMDs takenOwner’s current age: 65 yearsOwner’s age at death: 85 yearsBeneficiary’s age at inheritance: 55 yearsBeneficiary’s payout period: 28.7 yearsIRA rate of return: 7%Taxable account after-tax return: 5.9%Taxes paid from IRA upon conversion: 35%Taxes paid on all RMDs: 30%† Reflects the use of $350,000 from taxable account to pay taxes on conversion to Roth IRA.The above illustration is hypothetical, does not account for estate taxes and is not a predictor of the actual amounts that will be paid from the IRAs, which may be less than the amounts in the illustration because the actual rate of return and deferral period before the owner’s death may be considerably less than what has been assumed. There is no guarantee that a beneficiary will receive the amount projected in the illustration since the owner can elect to take distributions in any amount during his or her lifetime or give the funds to a charity upon death.