Another Silver Lining to Investing in an IRA

This is the time of year you will hear much about IRAs (Individual Retirement Accounts) This is because an IRA contribution is the last tax deduction you can still create for your 2012 tax return to make a pretax IRA contribution (provided that you not eligible for another form of retirement saving, ect 401k defined benefit plan, ect) you have until the date your return is due to make an IRA contribution or to add more money to an IRA contribution (typically April 15, 2013) You can contribute up to the 2012 limit of $5,000 (or $6,000 if you are age 50 or older). That annual $5,000 contribution can add up. Over a 30 year period, earnings just based on the stock market’s historic average annual return of 10% and dividends reinvested could result in a retirement fund of over $900,000…a respectable little nest eggimages[8]

There is also an estate planning silver lining to establishing an IRA a Stretch IRA, which is simply a transfer method that allows you the potential to “stretch” your IRA over future generations. Generally if you are fortunate enough to inherit someone elses IRA, you will be able to take minimum distributions each year from the IRA account based on YOUR life expectancy figure –regardless of your age. If you currently have an IRA or are eligible to contribute additional funds to an IRA one key component is that you properly designate your intended beneficiary.

As many of you are aware I have lost both of my parents with in the last 2 years.  By establishing the proper beneficiaries prior to their death we have been able to defer the amount of Required Minimum Distributions (RMDs), thus deferred ordinary income taxes.

As a general example:  Traditional IRA worth $500,000 on 12/31/2009 Owner: Charles (age 85 deceased 12/1/2009); *IRA Inherited by: a) Spouse: Marilyn (Age 81 in 2010)- Marilyn will establish  a “rollover IRA” and have to take an RMD of $20,234 in year 2010 b) Son: Chuck (Age 55 in 2010)- Chuck will establish an “inherited IRA” and have to take an RMD of $16,892 in year 2010 c) Granddaughter: Kristen (Age 28 in 2010)- Kristen will establish an “inherited IRA”and have to take an RMD of $9,042 in year 2010 Each beneficiary will have to continue to take the RMD each year thereafter based on the new life expectancy figure which must be computed each year from the IRS Publication 590 (IRA’s) from the Appendix C- Life Expectancy Tables section.

WHAT ACTION SHOULD TAKE? Contact every custodian of every IRA, 40l(k), 403(b), or other retirement plan, as well as every insurance policy, and ask them to send you — on their letterhead — the name of the beneficiary as currently listed on the plan. Determine whether the beneficiaries named are still the beneficiaries you intend to inherit any residual retirement plan. Then make two copies, giving one to your estate-planning attorney, one to your financial adviser, and filing the original for yourself, along with your copy of your will or estate plan.


The beneficiary of your retirement plan should be a living person —generaly not a trust and not your “estate.” Beneficiaries who are “persons” can stretch out their withdrawals from an IRA, allowing the money to continue to grow on a tax-deferred basis. Since an estate does not have a life expectancy, you don’t want to simply leave your retirement plan to your estate to be distributed, missing out on the chance to keep it growing.

In summary an IRA is certainly one of the best opportunities to defer taxes and grow your money.  If you take this opportunity, you should also ensure that your heirs retain all of the benefits they can.




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Posted in Achieving Financial Independence, Balanced Living, Estate Planning, Goals-Based Planning, Post-Retirement Planning, Tax Planning, Uncategorized and tagged , , , , , , , , , , .

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