Stretch that IRA

[pyriel]

In IRA talk #1, i've mentioned some advantages on why TSP, 401k, 403b etc. should be switched to IRA upon retirement. In IRA talk #2, ive mentioned the required beginning date (RBD) that an IRS made it mandatory for an individual to start taking out money from his IRA (1 April after the year the individual turns 70 1/2 years old). RMD is the required minimum distribution that one mustwithdraw every year upon reaching his/her RBD (you can actually take out more but you can not go below RMD).

Now, i'd like to talk about stretching your IRA. To stretch is to keep your inherited account growing tax deffered (or tax free if it's a ROTH IRA) by your beneficiaries for as long as is legally possible. The first step is tohave a designated beneficiary (and a secondary beneficiary if you want). When an individual dies with substantial amountin their IRA and he/shehave a designated beneficiary the IRA is passed on to that individual. However, the designated beneficiary does not have to withdraw the entire amount. He/she can stretch the RMD throughout his/her life expectancy. Lets see how this works: Tom unexpectedly diedand he had 1 million in his account. His designated beneficiary is his 25 years old son (or his wife or anyone he designated as his beneficiary). Tom's sonlife expectancy according to the IRS is is58.2 years. This means that Tom's soncan stretch Tom's 1 million IRA for 58.2 years by taking only the RMD. I am attaching a copy of an excel worksheet to show people how powerful “stretch IRA” really is.

You can’t do this with TSP, 401k, 403b etc. This only applies to IRA. I believe that stretch for 401k is measly 5 years ( I think it is the same with TSP). Can you imagine if the inherited amount is a ROTH IRA? Can you see your beneficiary not having to pay any taxes to their RMD using their life expectancy? This is just my .02.

Pyriel

[Birchtree]

Pyriel- The whole key to parlaying wealth within an IRA or a Roth is to keep it growing tax deferred or tax free. The TSP as a form of deferred compensation more than likely will have a RMD. Perhaps as low as 4-5% annual, paid twice a year.There is no RMD for the original owner of a Roth. Inherited Roth IRA the RMD is set by age. The same is true for a regular IRA, only the RMD changes when the IRA is passed on. Regarding distributions: in a reguler IRA when someone other than a spouse is named beneficiary, fixed life expectancy, is the method that must be used. Annual distributions may be higher. With a spouse as beneficiary you use a combined expectancy. Once anyone retires everything going forward is impacted by your adjusted gross income for tax purposes. The objective should be in my opinion to contrl as much of your income as you can-I mean only take income when you want it. This syrategy requires some real planning because Uncle wants his share. A pension is nice to have but you cannot control the income-it will come every month even if you don't need all of it, there by helping to keep yourAGI elevated for tax purposes. //if your real estate provides income rather than as a capital gain then your AGI is impacted by incresing. The same holds true for social security>AGI. If your IRA funds have been deductable as in TSP all income is taxed as ordinary income helping to push your tax bracket up.

[Birchtree]

Pyriel- I have more. If you plan to invest while you are retired you will have some wonderful opportunities over the next 20-25 years. When you think about starting to transfer money to an IRA remain cognizant ofyour tax bracket. You will be taxed up front-suggest moving money in steps. You won't be able to roll your defined benefits pension into a defined contribution plan, which works unfortunately against you. Heir distributions are a nice process to defer income for the future. All you have to do is get it into proper accounts.Getting to the Roth in steps or even splitting them can be beneficial. The question becomes how to avoid taxes? One answer is to reduce AGI. The first year you retire live on a savings account and try not to take any pension money if possible, prolong your social security application, and do what you can to reduce your income. Then start the process of rolling funds from TSP to a regular IRA and then on to a Roth IRA. Your tax bracket should be 10% or less. And by the way there really is only one perfect solution. Have all your funds in equities(stocks) and then you can utilize capital gains and take them when you want. Heir distributions use a catch up basis where there is no tax at all until the asset is sold and then the built in capital gain is eliminated. If you could manage to keep yourself in the 15% tax bracket all capital gains and dividend income is taxed at 5%. That is not a mistake-all income outside AGI of 58,000$ is 95% tax free. Hopefully we will talk again. Dennis

[pyriel]

Birchtree, I really enjoy your comments. It seems that you have done some reading pertaining to IRA as well… I’ve commented on your comments and hope for you to talk more about your knowledge in TSP.
Pyriel- The whole key to parlaying wealth within an IRA or a Roth is to keep it growing tax (http://get-data.net/?go=tax) deferred or tax (http://000info.com/?go=tax) free. The TSP as a form of deferred compensation more than likely will have a RMD. (This is true, 401k, 403b, TSP, and Traditional IRA will all have RMD for the retiree but for the designated beneficiary, life expectancy tables does not apply. Some 401k administrators RMD beneficiaries as little as 5 years) Perhaps as low as 4-5% annual, paid twice a year (Hmmm… maybe but I have not seen it yet for TSP. For traditional IRA, owner must use single (http://000info.com/?go=single) life expectancy according to the IRS life expectancy table).There is no RMD for the original owner of a Roth. (True, this is because it will never be taxed since contribution made came from after tax (http://go-all.com/?go=tax) dollars) Inherited Roth IRA the RMD is set by age. (Inherited ROTH IRA is set by single (http://0-days.net/?go=single) life expectancy provided by the IRS in Publication 590 a 25 years old designated beneficiary will have a life expectancy of 58.2 years) The same is true for a regular IRA, only the RMD changes when the IRA is passed on. (Inherited traditional IRA must also use single (http://get-data.net/?go=single) life expectancy provided by the IRS in Publication 590, the only difference is that it will be taxed) Regarding distributions: in a reguler IRA when someone other than a spouse is named beneficiary, fixed life expectancy, is the method that must be used. (There is nothing in the Publication 590 that says that. Single (http://000info.com/?go=single) life expectancy must be used. ***There some other way to go around this) Annual distributions may be higher. (Please state IRS code on this since I have not read anything about this) With a spouse as beneficiary you use a combined expectancy. (Actually, it is called joint life expectancy table and is broken down for use by owners whose spouses are more than 10 years younger or as a last survivor expectancy) Once anyone retires everything going forward is impacted by your adjusted gross income for tax (http://get-data.net/?go=tax) purposes. (Hmmm… Not sure how does this pertain to RMD to designated beneficieary? For all retirees drawing contribution or to designated beneficiaries, they will be taxed, no matter what. Does not pertain to ROTH IRA). The objective should be in my opinion to control as much of your income as you can-I mean only take income when you want it. (Depends on individual retiree. If one has other retire benefits somewhere else then yes it could be done. However, other may not be as fortunate and must depend on a single (http://0-29.com/?go=single) IRA account. But that is what I would recommend as well) This syrategy requires some real planning because Uncle wants his share. (Yes, definitely. If not done correctly, it is possible to lose as much as 90% of what you have to Uncle Sam)
A pension is nice to have but you cannot control the income-it will come every month even if you don't need all of it, there by helping to keep yourAGI elevated for tax (http://get-faster.com/?go=tax) purposes. //if your real estate (http://0-2u.com/?go=real+estate) provides income rather than as a capital gain then your AGI is impacted by incresing. The same holds true for social security>AGI. If your IRA funds have been deductable as in TSP all income is taxed as ordinary income helping to push your tax (http://0-29.com/?go=tax) bracket up. (You are right. Careful planning is required)

Pyriel- I have more. If you plan to invest while you are retired you will have some wonderful opportunities over the next 20-25 years. When you think about starting to transfer money (http://0-2u.com/?go=money) to an IRA remain cognizant of your tax (http://0-29.com/?go=tax) bracket. You will be taxed up front-suggest moving (http://go-acct.com/?go=moving) money (http://get-faster.com/?go=money) in steps. ( I plan to talk about this later) You won't be able to roll your defined benefits pension into a defined contribution plan, which works unfortunately against you. (yes, but I think that is outside the realm of this discussion) Heir distributions are a nice process to defer income for the future. (I agree) All you have to do is get it into proper accounts. (actually, getting a designated beneficiary is the most important thing) Getting to the Roth in steps or even splitting them can be beneficial. (You hit it right on. But some retirees might not have the pension or the money (http://get-access.com/?go=money) to do that. However, this is great if you want to pass it on to your heir. I totally agree with you)

The question becomes how to avoid taxes? One answer is to reduce AGI. The first year you retire live on a savings account and try not to take any pension money (http://0-days.net/?go=money) if possible, prolong your social security application, and do what you can to reduce your income. Then start the process of rolling funds from TSP to a regular IRA and then on to a Roth IRA. Your tax (http://0-29.com/?go=tax) bracket should be 10% or less. And by the way there really is only one perfect solution. Have all your funds in equities(stocks) and then you can utilize capital gains and take them when you want. Heir distributions use a catch up basis where there is no tax (http://0-2u.com/?go=tax) at all until the asset is sold and then the built in capital gain is eliminated. If you could manage to keep yourself in the 15% tax (http://go-acct.com/?go=tax) bracket all capital gains and dividend income is taxed at 5%. That is not a mistake-all income outside AGI of 58,000$ is 95% tax (http://000info.com/?go=tax) free. Hopefully we will talk again. Dennis ( I totally agree with you. That is one way to plan it. Although, there are also multitude ways of going around it, I will be the first one to admit that there are also many, many reasons on why people can’t do the plan you mentioned. This is the reason why people must plan their retirement and how they plan to leave their hard earned retirement to their designated beneficiary/ies)

[Birchtree]

Pyriel, thanx for your patience-I'm still rather new to the internet scene-I've always been a print guy. Perhaps I will open up my own account forum and see if I can draw that Wonder Woman out. Anyway, the RMD for an inherited Roth IRA is set by age. That's why money that is left to heirs in a Roth, especially grandchildren, can be particularly effective, because they would get tax-free compounding for many decades. Again, one must pay income taxes on the amount you convert to a Roth. Later I will discus some of the IRS traps that have been set. To me the advantages of the Roth outweigh the tax drawback, particularly if heirs withdraw the Roth assets over their lifetime. And fortunately life expectancy tables do apply. The younger an heir to the Roth or even a regular IRA, the smaller the RMD. Heirs must pay income taxes on regular IRA assets, therefore the younger the hier, the lower the RMD, the lower the taxes. The remaining funds continue to grow, hopefully with an expanding economy and subsequently with rising markets. This is another whole topic for a later time. Here comes the good part-in a Roth heirs can withdraw any amount of assets free of income taxes. It's a good way to buy that first $70000 Corvet. Just kidding. Watch them kids. Dennis

[Birchtree]

Pyriel- may I take a few more minutes? Now on to the TRAPS the IRS has set up to snag unsuspecting citizens. If a participant happens to work with the IRS don't take offense-we all have our jobs to do. There was recently an IRS special review letter regarding life expectancy tables for heir distributions from regular IRAs. You won't find these in publication 590, but these letters become precedent setting and eventually official. I'll see if I can find it in my WSJ copy. Firstly, as a couple you cannot convert a regular IRA to a Roth if your AGI is more than $100,000. It may have actuall expanded recently-but it won't be by much. Why would Uncle want to cap ones ability to transfer funds to a tax-free account? Especially after you worked so long and so hard. Uncle simply wants his share and he don't care. Now, designated beneficiary life expectancy tables have to apply otherwise taxes to the heir would be enormous. Here we go-when a regular IRA is inherited, estate taxes are due if the assets in the estate exceed $1.5 million. Keep it down-then pay income taxes on the money as it is withdrawn. I believe the Roth is also subject to the estate taxes cap. IRAs do however pass directly to named beneficiaries-nothrough your will, therby avoiding probate.

[Birchtree]

Pyriel-only a few more minutes then I shall rest. Jimmy Cricketts, the more I get into this topic the more complicated it seems to get. But perhaps we can possibly help others make some important decisions for the future. Not only do you have to make money you have to work just as hard to keep what you have saved over the years. After all some of us may be retired longer than the years we worked. Why not keep our money working too. Keep it in the family. When you name your spouse as beneficiary, the assets pass to the spouse free of estate taxes. Choosing your spouse as initial beneficiary also allows the option of recalculating combined life expectancy each year, which generally extends the number of years for distributions, thus lowering their size. By recalculating, you are alwys assured there will be a balance ib the IRA during your lifetime. How you have it invested becomes very important to helping growth. Here comes the sad part, or not. The most compelling reason for naming a spouse, however, is that upon your death, your spouse can roll your retirement funds over into a new IRA. By naming a new younger beneficiary-usually kids-the surviving spouse can stretch payments even further into the future. As I said before-even decades. Now here comes a terrible trap and then I will rest. To ensure a liftime income stream from a Roth, heirs must make the first withdrawal by 12/31 of the year following the IRA owner's death. If they don't , they must cash out the account by the end of the fifth year following the year of death. Dennid

[pyriel]

Birchtree wrote:
Pyriel, thanx for your patience-I'm still rather new to the internet scene-I've always been a print guy. Perhaps I will open up my own account forum and see if I can draw that Wonder Woman out. Anyway, the RMD for an inherited Roth IRA is set by age. That's why money that is left to heirs in a Roth, especially grandchildren, can be particularly effective, because they would get tax-free compounding for many decades. Again, one must pay income taxes on the amount you convert to a Roth. Later I will discus some of the IRS traps that have been set. To me the advantages of the Roth outweigh the tax drawback, particularly if heirs withdraw the Roth assets over their lifetime. And fortunately life expectancy tables do apply. The younger an heir to the Roth or even a regular IRA, the smaller the RMD. Heirs must pay income taxes on regular IRA assets, therefore the younger the hier, the lower the RMD, the lower the taxes. The remaining funds continue to grow, hopefully with an expanding economy and subsequently with rising markets. This is another whole topic for a later time. Here comes the good part-in a Roth heirs can withdraw any amount of assets free of income taxes. It's a good way to buy that first $70000 Corvet. Just kidding. Watch them kids. DennisI totally agree with you. Just like the excel worksheet I provided in the beginning of this thread, heir can live life comfortably for the rest of his life. (see excel worksheet on the first thread)