Are you fond of making assumptions? Not the kind of assumption that suggests you know what you will do tomorrow or the next but sixty, perhaps seventy years done the road. Can you create a retirement plan for your grandkids?
The assumptions you make about how much money you will need in retirement are probably the most difficult exercise in the whole of retirement planning. The unknowns are so numerous that simply thinking too much about it gives many people the incentive to simply ignore the question. Taxes and inflation play a role in how much money we will need along with the condition of our health, our portfolios and our living arrangements. Who could possibly guess with any accuracy what those costs will be?
Yet, some of us can with certain investments. If you can wait until you are 70 1/2 years-old to begin taking your distributions from an IRA, and you take only the minimum amount needed, you may be in a position to make that IRA last much longer, across generations. Called a Stretch IRA, the sort of planning can create untold wealth for a child or grandchild.
The idea is actually quite simple. Previously, when a beneficiary, other than a spouse, inherited an IRA, they would be required to take the money and pay the taxes. Current tax law now allows you to name a beneficiary that is younger than you by more than ten-years.
Not all custodians allow you to set-up a Stretch IRA. Once you find one that does, the process is rather simple. You decide that you will take the minimum distribution once you reach the age when you have to take it (70 1/2). This will allow whatever money in the account the opportunity to continue to grow and it reduces your taxable income. Then you die.
The younger-than-you-by-at-least-ten-years beneficiary then produces to the custodian proof of your demise and the IRA is then rolled over into what is known as an inherited IRA, which is still in the parent’s name. This saves the beneficiary a huge tax bill in the process (the IRA otherwise would have been taxed at the beneficiary’s current income tax rate) and if the new owner is able to, they would also take the minimum distribution and only when required to do so.
They could begin taking a distribution from the IRA at their first opportunity. But this creates the chance that they may deplete the account of funds before they too can pass it along. If the beneficiary in turn does what the original owner did, the returns remain more or less constant, the tax laws don’t change significantly and the custodian goes along with the stretch plan, the next generation could, in theory find a significant fortune waiting for them when they retire.
This could all fail to take place if the original owner names the estate instead of a specific beneficiary by name. In that instance, the IRA would be cashed out within five years and the taxes would ned to be paid.
This would also allow the original owner to ignore the common wisdom of protecting the IRA with a move to conservative asset protection as they reached retirement. They could keep the majority of the IRA in stocks for much longer if the plan is to all compounding to grow the fund over many generations.
As I said earlier, the assumptions also cross multi-generational lines, markets and needs. If at any time the beneficiary decides the need for the money is greater than the wishes of the original owner, there isn’t much that can be done. yet the potential is there to keep an IRA in the family for decades beyond the original owner’s initial investment.
Read more about this concept.
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