“Strechout” of RMDs
Thanks to new IRS rules, the beneficiaries of an IRA may now “stretchout” their taxable, required minimum distributions over their own life expectancies. This means your IRA may compound income-tax free for a much longer period — and literally grow to be worth millions.
For example, let’s say your IRAs total $150,000 at your death and your beneficiary is age 50 when he or she inherits them. If we assume that the accounts grow at 8% per year, and your beneficiary only takes out the required minimum distributions, at age 80, your beneficiary will have already received about $700,000 of distributions and still have remaining in your IRAs almost $300,000 (which may continue to grow tax-free and be passed on to his or her children)! In other words, as the result of the new IRS “stretchout” rules, your IRAs may well be worth, over time, in excess of $1 Million and may become the largest assets you pass on to your loved ones.
Risk of Missing the Stretchout
The problem is, this income tax “stretchout” is not automatic. You have to do proper advance planning. Your IRA must have the right beneficiaries. You can simply name your children or other individuals as beneficiaries of your IRAs, but that can be very risky. Why? Because individuals may unintentionally blow the income tax “stretchout”, and potentially cost your family millions. This may happen because your beneficiaries are not aware of the tax rules and their distribution choices. Or a beneficiary, influenced by his or her spouse or an unscrupulous third party, may just decide to withdraw your lifetime’s savings to foolishly spend or poorly invest it.
Other Risks of Outright Distribution
And even if your beneficiaries carefully maximize the income tax “stretchout” of your IRAs, your life’s savings may still be at risk to: needless estate and generation skipping taxes at a 40% rate; squandering due to imprudent spending or investing; and confiscation by divorcing spouses, creditors, or litigants. Naming your Living Trust as the beneficiary of your IRAs will not minimize all of these problems and qualify for the maximum “stretchout” of income taxes.
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