How To Help Your Family Maximize Your “IRA”: And AVOID Immediately Ruining a Great Asset

Financial Advisor Teresa Bear explains how you can maximize the effectiveness of your IRA when passed along to children

Phoenix, AZ – One of the more unreported concerns for retirees is how to protect your family when the time comes to pass along your IRA to your spouse and children when you’ve reached the end of your life.  Finding ways to maximize the value of your IRA for your family and avoiding painful tax implications is an important strategy that needs to be planned and implemented by a qualified financial advisor. Teresa Bear provides some simple straightforward guidance on how to navigate these dilemmas and even find ways to help enrich your family in the process:

– “Make a good move and your family may be able to harvest millions from a well-designed IRA distribution plan.  Do it wrong, and the IRS may become your IRA account’s biggest beneficiary,” said Teresa Bear, President of JC Grason of Mesa, LLC.

“Let’s focus on doing this right and what the tax law permits you to do that can enrich your family.  The concept is called many things. Some call it a “stretch IRA” (some like to call it making an IRA “multi-generational.”) The idea is simple –  it’s to take only what is required and stretch payments out over as long of a period of time as possible.”

“A quick true-life story about time and money – specifically, the power of compounding money over time – comes from Benjamin Franklin,” said Bear. “Ben Franklin died in 1790 and left his $4,000 estate to the State Of Pennsylvania and the City Of Philadelphia with one stipulation.  That restriction being that the money could not be accessed for 200 years and it had to be very conservatively saved.  In 1990, the State and City had a fund with $1,500,000, most of which went to support scholarships at Penn State University, with the compounded rate of return at just 3% (certainly conservative).”

“The power of compounding money safely is within your family’s grasp.  It is one of the few tax plans that favors the family over the taxman.  Here it is: when you reach the age of 70 ½, you must take Required Minimum Distribution (RMD).  Your spouse may use your IRA post your death for their retirement income and manage the account as their own.  This is in stark contrast to an “inherited IRA” where distributions are required at ALL ages.  So, if a widowed female died today with a $400,000 IRA and had two children ages 51 and 55 – her adult children MUST take distribution based on their single life expectancy or face penalties.  If she left her entire IRA to her grandchildren who were ages 23 and 25, they MUST take distribution – it’s called Required Beneficiary Distribution (RBD).  The key to maximizing your IRA’s value is having a great advisor who knows this math. Here is an example of what you can do:

Let’s go back to the beginning and assume your friend is John, he’s 70 years old and has a $1,000,000 IRA, (congrats to John, he’s a hard worker like you!) and his wife Jane is healthy and 65 years old.  They have two children Tim and Barbara ages 47 and 42; PLUS, three lovely grandchildren: Timmy, Jr. age 10, Suzie age 6 and the baby Ashley who just turned 4.  John being a well-educated and financially savvy guy made sure his account could be stretched out so that his family had the possibility of getting the following outcome:

• John from age 70-88 would take out $1,166,491 of Required Distributions (and assuming a 6% rate of return). At his death Jane would inherit $1,127,399 and by age 90 she would take $575,273 of distributions at (again assuming a 6% rate of return) and leave her beneficiaries $1,011,500.

• At Jane’s death the beneficiaries were 30% Tim, Sr, 40% Barbara, 10% to Tim, Jr and 10% to his sister Suzie, Barbara’s baby Ashley would get 10%, as well.

• Tim, Sr. would inherit the IRA with an initial balance of $303,450 and take distributions of $550,238 out over his 14.8-year life expectancy (assuming a 7% rate of return).

• Barbara would inherit $404,600 and take distributions of $800,954 over her 18.6-year life expectancy (assuming a 7% rate of return).

• Timmy, Jr. would inherit $101,150 and assuming a higher rate of return of 8% he would take out $1,166,313 over his 47.5-year life expectancy.

• Suzie would take out $1,472,404 on her inherited $101,150 and 51.4 year period of distribution (assuming an 8% rate of return) and Baby Ashley on her inherited IRA of $101,150 would take $1,651,617 over her 53.3-year life span (again assuming 8%).

How does it all add up?  Well the family gets total distributions of $7,383,290 stretching out dad and Grandpa’s IRA – not too bad at all BUT there are a couple of catches here: first, tax laws could change (an ever present risk) and we are talking about a long time.  Also, the chance of everyone following the schedule is slim – but here’s the hook ……

If you don’t structure your IRA account this way then the chance of anyone taking advantage of this compounding opportunity is zero for the same reason you wouldn’t think about the taxes until after you won the ‘big prize’ from the prize patrol above.  Through good estate planning you can leave a great ‘set of instructions’ to your family so that wealth building opportunities like the stretch IRA aren’t missed.”

Note: Example is for illustrative purposes only and is not intended to project the performance of a specific investment. Keep in mind that a plan of regular investing does not assure a profit or protect against loss in declining markets.
For more information on how Teresa Bear can help, please visit www.teresabear.com.

About Teresa Bear:

Teresa Bear is the President of JC Grason of Mesa, LLC and specializes in retirement planning and asset preservation for retirees and their loved ones. She has been a Certified Public Accountant practicing in the area of taxation for more than 25 years and is also a Certified Financial Planner ™.  She is also an Investment Advisor Representative with Brookstone Capital Management LLC, a SEC Registered Investment Advisor.

Teresa is a graduate of Graceland University in Iowa and has an MBA from the University of Kansas. She is also the bestselling author of the book She Retired Happily Ever After. Teresa has been featured in the USA Today and seen in the October 2012 issue of Woman’s Day Magazine.