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Stretch
Your Legacy
By Candace
Bahr, CEA, CDS
 When
Janice’s husband died suddenly
at age 56, she was left with overwhelming
shock and grief plus mounds of paperwork.
We helped her deal with the paperwork
as she made decisions, such as rolling
over and investing the proceeds of
her husband’s retirement plan
into an IRA in her own name.
But then her situation got worse:
within months of her husband’s
death she found she had Stage 4 breast
cancer, and she died just 8 months
later at age 52. That’s when
we were able to help the adult children
avert paying taxes unnecessarily.
Janice had named the children as
beneficiaries of her IRA. The general
rule is that they needed to withdraw
the funds and pay tax within five
years, but in this case that wasn’t
the smartest thing to do.
If you leave your IRA assets to
the kids, they have several choices
after you die. They can withdraw
the money and pay all the tax due,
immediately. Or they can defer that
distribution over five years. This
softens the tax hit somewhat, but
there’s a better option still:
the stretch provision. To take advantage
of that provision, we established
a beneficiary IRA for each child
within a year following their mother’s
death, and the children then elected
to receive distributions over their
lifetime. This allowed the funds
remaining in the IRA to grow on a
tax-deferred basis.
Because these children were in their
20s, they were required to withdraw
only 2% a year, based on their life
expectancies, and the remaining funds
could grow tax deferred. Even after
distributions of $12,000 a year,
assuming a rate of 7%, the IRAs will
grow from $450,000 to $3 million
by age 65. And the children have
flexibility: they can make additional
withdrawals over the years without
paying a penalty.
Transferring inherited IRAs to non-spousal
beneficiaries can be tricky, and
knowing the exceptions to the rules
can make a million dollars of difference.
If the kids had taken as little as
$1 in distributions before they rolled
it into their own beneficiary IRAs
they would not have been able to
take advantage of this stretch provision.
It was tragic that these children in
their twenties lost both their parents
so young, but their parents left a
legacy through good planning and advice.
At WIFE we welcome your comments. Please feel free to contact us.
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