Maximizing Inheritance with a Stretch IRA Trust

This Article discusses the Stretch IRA Truststretching money

One of the goals of most Estate Plans is to maximize the value to those who inherit.  IRAs provide one example why experienced advice is necessary.  By following the IRS trust rules heirs can receive tremendous benefits from the tax deferred benefits of an IRA or 401k.

A Stretch IRA Trust can provide dramatic income potential to beneficiaries.

There are special rules for how IRAs and 401ks can be inherited. Unless these rules are followed non-spouse beneficiaries must liquidate an IRA within 5 years. This may result in large tax consequences.

The “Stretch” IRA Trust allows the beneficiaries to take smaller distributions over their lifetime. This prolongs the IRA’s tax deferral benefit.

How IRAs and 401ks work:

IRAs and 401ks are retirement plans that are funded during the working life of an individual.  Income is allowed to accumulate in the accounts tax free.  You must begin taking distributions by April 1 following the year in which you turn 70½.  The tax laws require you to take Required Minimum Distributions or RMDs. The amount of the required minimum distribution is based upon the age of the taxpayer. 

The amount of the RMD is based upon the IRS life expectancy.  For example for an an individual who is 71 must withdraw about 3.9%.  The amount of RMD increases as you age.  An individual who is 85 must withdraw about 7.25% and a 90 year old must withdraw about 9.62%.

What can happen with a Stretch IRA?  Example:

  • IRA has $500,000 balance at death.
  • Beneficiary is 35 years old.
  • The investment grows at the rate of 8%.
  • The beneficiary lives to 80.
  • The Beneficiary takes the RDMs

The beneficiary would have received approximately $3.6 million in distributions and there would be a remaining balance of approximately $2,247,000 in the IRA.  These results are possible because the monies continue to grow tax deferred.  These results are based upon several assumptions and may not be typical.

This calculator may be used to run some examples: Calculator

 

Stretch IRA Calculator

Stretch IRA Calculator

 

Common Mistakes:

Using a general trust as a beneficiary.  This may cause significant tax consequences.

Failing name the IRA Beneficiary Trust as the beneficiary.

For questions about this article or to find out more please contact Richard Winblad at 405.340.6554 for a Free Initial Consultation, or complete the contact form to the right.

CIRCULAR 230 DISCLOSURE: U.S. Treasury Department Regulations require that we advise you that unless otherwise expressly indicated, any federal tax advice contained in this website is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

 

About Richard Winblad

Richard Winblad is a lifelong Oklahoma City Metro resident with a law practice focused on Elder Law and Estate Planning. His practice focus helping seniors and veterans by giving sound legal estate planning advice including Medicaid Estate Planning and Veteran’s Benefit Qualification. In 1984, Richard graduated from OSU with an undergraduate degree in Business he later sought and earned a Law Degree from the University of Oklahoma in 1992. His practice is based in Edmond and is held in a beautiful pre-statehood home close to UCO at 102 E. Thatcher. He is president of the Oklahoma City Commercial Lawyers Association, a group that provides legal an ethical training for attorneys. He is also a member of “Lawyers with Purpose”, an organization that provides in depth training and support to attorneys who practice in the area of elder law. He received an AV Preeminent® rating by his peers through Martindale-Hubbell® Peer Review Ratings™. Dedicated to educating the public, Richard does workshops and presentations all around the state for professionals and laypersons. These programs provide vital information to our veterans and seniors as they look forward in planning living and financial needs that fit their desires.

Leave a Reply

show