Financial Advisor Matthew Zagula explains how you can maximize the effectiveness of your IRA when passed along to children
Pittsburgh, PA – One of the more unreported concerns forretirees is how to protect your family when the time comes to pass along your IRA to your spouse and children when you’ve reached the end of your life. Finding ways to maximize the value of your IRA for your family and avoiding painful tax implications is an important strategy that needs to be planned and implemented by a qualified financial advisor. Matthew Zagula provides some simple straightforward guidance on how to navigate these dilemmas and even find ways to help enrich your family in the process:
“Make a good move and your family can harvest millions from a well-designed IRA distribution plan. Do it wrong and the IRS becomes your IRA accounts biggest beneficiary,” said Matthew Zagula, President of First Financial Advisors and Bleier Zagula Investments.
“Let’s focus on doing this right and what the tax law permits you to do that can enrich your family. The concept is called many things – a “stretch IRA” some like to call it making an IRA “multi-generational” – the idea is simple it’s to take only what is required and stretch payments out over as long of a period of time as possible.”
“A quick true life story about time and money; specifically, the power of compounding money over time is Benjamin Franklin,” said Zagula. “Ben Franklin died in 1790 and left his $4,000 estate to the State Of Pennsylvania and the City Of Philadelphia with one stipulation. That restriction being the money could not be accessed for 200 years and it had to be very conservatively saved. In 1990, the State and City had a fund with $1,500,000 most of which went to support scholarships at Penn State University – the compounded rate of return – just 3% (certainly conservative).”
Matthew Zagula continues, “The power of compounding money safely is within your families grasp. It’s one of the few tax plans that favor the family over the taxman. Here it is: when you reach the age of 70 ½ you must take Required Minimum Distribution (RMD), your spouse may use your IRA post your death for their retirement income and manage the account as their own. This is in stark contrast to an “inherited IRA” where distributions are required at ALL ages. So, if a widowed female died today with a $400,000 IRA and had two children age 51 and 55 – her adult children MUST take distribution based on their single life expectancy or face penalties. If she left her entire IRA to her grandchildren who were ages 23 and 25 they MUST take distribution – it’s called Required Beneficiary Distribution (RBD). The key to maximizing your IRA’s value is having a great advisor who knows this math because here’s what you can do:
Lets go back to the beginning and assume your friend is John, he’s 70 years old and has a $1,000,000 IRA (congrats to John, he’s a hard worker like you!) and his wife Jane is healthy and 65 years old. They have two children Tim and Theresa ages 47 and 42; PLUS, three lovely grandchildren: Timmy, Jr. age 10, Suzie age 6 and the baby Ashley who just turned 4. John being a well-educated and financially savvy guy made sure his account could be stretched out so that his family had the possibility of getting the following outcome:
· John from age 70-88 would take out $1,074,860 of Required Distributions (at 6%)
· At his death Jane would inherit $1,233,823 and by age 90 she would take $604,684 of distributions at 6% and leave her beneficiaries $1,137,007.
· At Jane’s death the beneficiaries were 30% Tim, Sr., 40% Theresa, 10% to Tim, Jr. and 10% to his sister Suzie, Theresa’s baby Ashley would get 10%, as well.
· Tim, Sr. would inherit the IRA at age 72 with an initial balance of $341,102 and take distributions of $636,752 out over his 16-year life expectancy (assuming a 7% rate of return).
· Theresa would inherit $454,803 at age 67 and take distributions of $998,298 over her 20-year life expectancy (assuming a 7% rate of return).
· Timmy, Jr. would inherit $113,701 at 35 years old and assuming a higher rate of return of 8% he would take out $1,391,223 over his 49-year life expectancy.
· Suzie at 31 would take out $1,758,091 on her inherited $113,701 and 53 year period of distribution (at 8%), while Baby Ashley on her inherited IRA of $113,701 would take $1,972,976 over her 55-year life span (again assuming 8%)
How does it all add up? Well the family gets total distributions of $8,436,886 stretching out dad & Grandpa’s IRA – not too bad at all BUT there’s a couple of catches here: first, tax laws could change (an ever present risk) and we are talking about a long, long, long time and the chance of everyone following the schedule is slim - but here’s the hook ……
If you don’t structure your IRA account this way then the chance of anyone taking advantage of this compounding opportunity is zero for the same reason you wouldn’t think about the taxes until after you won the “big prize” from the prize patrol above – next month we will continue and talk about how through good estate planning you can leave a great “set of instructions” to your family so that wealth building opportunities like the stretch IRA aren’t missed.”
For more information on how Matthew Zagula can help, please call 1-800-723-0533.
Matthew Zagula has been a coach to the nation’s top lawyers specializing in estate planning and elder law, an accomplished financial advisor to his clients, an author, radio personality and founder of several institutes dedicated to providing sound fiscal advice to veterans and seniors for just about the last 20 years.
Zagula’s experience in insurance and financial planning began with Guardian Life Insurance Company and extends through a position with Northwestern Mutual where he acted as a special agent for advanced cases. Zagula has an extensive background in retirement and estate planning, and executive benefits.
Zagula has been and continues to be at the forefront of many training programs with some of the nations best Elder Law Attorneys and Financial Advisors.