Stretch IRA

What is a “stretch IRA?” If an IRA owner defers his or her account until 70.5 years of age…then takes just RMD each year (with no distributions in excess of RMD - even though the IRA owner could liquidate the entire IRA account). Then the IRA owner dies, and the IRA asset goes to the spouse. The spouse defers until she or he is 70.5 years old, and then takes RMD each year (with no distributions in excess of RMD). Then the spouse dies, and the asset goes to the son or daughter. Instead of liquidating the IRA and buying a house (non-stretch), the son or daughter defers the IRA over his or her life expectancy and pays RMD each year. In this manner the asset grows tax deferred getting excessively large over time.

What are the problems with the “stretch IRA?”

1. You can’t use the money before or after retirement (with the exception of RMD - if you want to stretch the IRA).
2. Your spouse can’t use the money (with the exception of RMD - if you want to stretch the IRA).
3. The contingent beneficiary should be named on the IRA account before the death of the original IRA account holder, due to some custodians not allowing the stretch option.
4. If the original IRA account holder converted to a Roth IRA in the first place, the net balance received by contingent beneficiary would have been larger (since the account is not taxed).

That’s the bottom line. If you plan to give your IRA to your beneficiary…then convert the asset to a Roth. The only problem with the Roth is the contingent beneficiary must take RMD that’s tax free. He or she can not liquidate the Roth in full, or the account reverts back to the same tax liability as the IRA.

Sincerely,

John Bagwell

The Truth About Financial Products.com

www.thetruthaboutfinancialproducts.com

Roth IRA

IRA’s are designed to be liquidated to zero over time (based on RMD) with no possibility of recovery of principal (and distributions are fully taxable)…this is a major flaw. But, if you designed a mathematical solution which you broke-up the IRA assets into three piles, income, growth, and recovery…you could solve for recovery tax free (and still solve for income). [See: http://www.mutualfundrecoverysolutions.com/]

The income & growth legs would remain IRA’s and be liquidated to zero over a short period (such as 10 years) to solve for immediate income (and solve for RMD).You would convert the recovery leg IRA to a Roth…to solve for recovery of principal (tax free). The conversion tax would either be paid in one year or paid over five years.

By breaking the asset up into three piles, you are able to convert the IRA to Roth and leverage the taxable liability to a much lower figure. Take the example of a $100,000 IRA converted to a Roth (based on a 28% tax bracket), the conversion would cost $28,000 to covert to a Roth…and you would have to wait 5 years before accessing the asset for income. Yet, if you broke the IRA asset up into three piles, income, growth, and recovery…the recovery leg would only have a starting principal of $48,101.71 in the recovery leg. $41,101.71 x 28% = $13,468.47 in conversion tax liability. Would you rather pay $28,000 to covert $100,000 IRA to a Roth, or would you pay $13,468.47 to covert an IRA to a Roth that would grow into $100,000 Roth account…tax free?

The mathematical IRA/Roth solution would solve for immediate income (by liquidating the IRA’s in the income & growth legs) to solve for monthly or annual liabilities…yet solve for recovery (tax free). Truly the best solution for a Roth IRA conversion!

In addition, many people wonder about how an IRA will affect their spouse at death. IRA distributions are taxable regardless if we are talking about a distribution over a lifetime or over a 5 year period. By converting to a Roth IRA, the spouse will enjoy the benefits of a tax free distribution versus a taxable distribution. Would you want your spouse to have a taxable liability or a tax free asset?

Sincerely,

John Bagwell

The Truth About Financial Products.com

www.thetruthaboutfinancialproducts.com  

Computing the Required Minimum Distribution (RMD) For IRA's

1. Find your account balance for your IRA’s as of December 31^st.

1. The first RMD withdrawal will be based on the account balance as of December 31^st prior to reaching 70.5…even though you may be 71 years old at the time of the first RMD computation.

2. Money rolled over in the IRA is included (the year of the rollover)…even though it was not received by December 31st.

3. All RMD calculations (with the exception of #b above) are based on the account balance as of December 31^st…from the prior year.

2. Divide the account balance in Step #1 by the “life expectancy” factor.

1. You have two tables in the “life expectancy” table to choose from (Uniform or Joint).

2. If you are single…use the “Uniform” factors.

3. If you have a spouse who is younger than you (1 yr. to 10 yrs younger)…use the “Uniform” factors.

4. If you have a spouse who is 11 yrs. to 30 yrs. younger (as example)…use the “Joint” factors.

5. You can change from “Uniform” to “Joint”…if your spouse is the sole “primary beneficiary” for the entire year.

6. If there are multiple beneficiaries designated as the “primary beneficiary”…then you must use the “Uniform” factors.

7. Example: You are age 71. The RMD factor for Uniform is 26.5. The account balance as of December 31^st is $100,000. Then the RMD is $3,773.58 (100,000/26.5).

8. If you remarry the year of the divorce, you still are considered married based on the “ex’s” age (for the RMD computation). But you can get a “spousal exception” from the IRS.

3. If the client has more than one IRA.

a. Although you must calculate RMD separately for each IRA, you do not have to make withdrawals from each IRA. The total RMD may be taken from just one IRA to pay for the aggregate RMD of all the IRA’s.

4. What is the most efficient way to liquidate an IRA and meet RMD payment plan?

1. You are required to pay your RMD till age 115. This is basically a pension to the IRS. You are losing 30 years worth of tax deductions in a decade of RMD payments. This is basically a tax liability to you and your spouse.
2. The most efficient way to liquidate RMD…is to compress the RMD into a shorter time span. Mathematically breakup the IRA(s) into three groups…and income leg, a growth leg, and a recovery leg. For the recovery leg, you are converting the IRA to Roth…so you no longer need to pay “Uncle Sam,” and the “initial starting balance” is recovered tax FREE. The income & growth legs are liquidated over a 10 to 15 year time span to meet & exceed RMD. Once the income & growth legs (your IRA’s) are liquidated, your recovery leg recovers the “original starting balance” of all your IRA’s…tax free. You no longer need to worry about RMD, and you have recovered the initial starting balance of the IRA’s tax free. And what’s nice, to “top it off” you can compute the recovery leg to exceed the “original starting balance.” If your interested in such an equation, please go to: mutualfundrecoverysolutions.com .

Sincerely,

John Bagwell

The Truth About Financial Products.com

www.thetruthaboutfinancialproducts.com