Stretch Out Your IRA
Courtesy Dan and R. Brennan Barlow, Barlow Capital Advisors, Denton LIVING WELL Magazine
After years of saving, you’ve accumulated significant wealth in your individual retirement accounts (IRA). So, what do you do next? You may want to think about extending the life of your IRA by stretching out its tax deferral over your life and the lives of your children and grandchildren.
Although it is one of the most widely overlooked aspects of these retirement savings accounts, a properly structured beneficiary designation could extend the stretch-out of income tax deferral on your IRA assets for years after your death. Even though your beneficiaries will typically be required to take annual minimum distributions after your death, your IRA assets can continue to enjoy tax-deferred accumulation.
In order to successfully enhance your IRA’s future potential, you will need to consider the possible threats to your IRA so you can take steps to guard against them. When you reach the age of 70 ½, you must start taking distributions – generally called required minimum distributions (RMDs) – from your traditional IRAs. RMDs can produce two undesirable results. First, they can reduce the amount of assets available to accumulate tax deferred. And, second, they can trigger income taxes on distributed amounts.
To reduce the effects of RMDs on your IRA, consider converting your traditional IRA to a Roth IRA. As of 2010, eligibility requirements for Roth were eliminated. Converting to a Roth IRA does not avoid income tax. In fact, you must pay income tax on the taxable amount you convert for the year of conversion. Once converted, assets in a Roth IRA won’t face future RMDs during your lifetime. Additionally, Roth IRAs offer tax-free growth and distributions, provided certain criteria are met. Remember, that you do not need to convert your entire traditional IRA balance at once. So, you may want to convert portions of your traditional IRA balance over several years. If you are age 70 ½ or older, you cannot convert your current year’s RMD. You must take it before converting any remaining balances.
In order to further protect your IRA assets, you may also want to consider an insurance policy or a trust. A life insurance policy’s death benefit can provide necessary liquidity to pay estate taxes so your IRA can remain intact for your heirs. Designating a trust as the IRA beneficiary can help you ensure that a spendthrift beneficiary will not destroy the stretch benefits of the IRA by cashing it all out. Certain rules do apply when naming a trust as a beneficiary and using the stretch concept, so be sure to consult your financial and legal advisors for more information.
Your financial advisor can provide a customized Stretch IRA Analysis to help you plan for the potential growth and distribution of your IRA. The Stretch IRA Analysis can address RMDs during your lifetime, IRA stretch-out distributions for your beneficiaries and common retirement planning strategies.
As Wells Fargo Advisors do not offer tax or legal advice, please consult with your chosen advisor before making any decisions that could have legal or tax consequences.
This article was written by Wells Fargo Advisors and provided courtesy of Dan and R. Brennan Barlow, Managing Partners, in Flower Mound at 972-539-1400.
Wells Fargo Advisors is the trade name used by two separate, registered broker-dealers and nonbank affiliates of Wells Fargo & Company providing certain retail securities brokerage services: Wells Fargo Advisors, LLC Member SIPC, and Wells Fargo Advisors Financial Network, LLC (WFAFN), Member FINRA/SIPC.
Provided by courtesy of Dan and Brennan Barlow, Managing Partners with Barlow Capital Advisors, LLC in Flower Mound at (972) 539-1400. Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), member FINRA and SIPC, a registered broker-dealer and separate nonbank affiliate of Wells Fargo Advisors. Barlow Capital Advisors, LLC is a separate entity from WFAFN.
Investments in securities and insurance products: NOT FDIC-INSURED/NOT BANK-GUARANTEED/MAY LOSE VALUE