The Advantages of a Stretch IRA

Transcription

1 Lifetime Retirement Planning with Wachovia Securities. The Advantages of a Stretch IRA Much is being heard these days about a concept called the Stretch IRA. This phrase is bandied about as being the answer to the IRA and estate concerns of many investors. It is important to understand what the phrase, Stretch IRA means for our clients at Wachovia Securities. A Stretch IRA is not a special type of IRA, instead it reflects an approach to estate planning that attempts to maximize the tax-deferred growth potential of IRA assets by leaving them in the IRA for as long as the law permits. The Stretch IRA approach avoids large, lump-sum distributions to the IRA owner and his or her beneficiaries, and spreads out the distribution of IRA assets to one or two later generations. Wealth can generally be enhanced through the tax-deferred compounding effect. Changes in the tax rules governing distributions from IRAs enhance the advantages of stretching an IRA. This fact sheet focuses on the advantages provided by the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) rules on Required Minimum Distributions (RMDs). Please consult your tax and/or legal advisors for more information before you attempt this strategy as Wachovia Securities does not provide tax or legal advice. Please note that this fact sheet does not address distributions from an IRA in the form of an annuity. The key advantages of a Stretch IRA include: Payments May Be Spread Over a Longer Period of Time. IRA account owners over 70½ use the Uniform Table to take RMDS. These lower distributions may mean that your IRA assets last longer. IRA Assets Are Tax-Deferred Even While Payments Are Being Made to Beneficiaries. While RMDs are being withdrawn from the IRA using the single-life table (term-certain), the bulk of the assets may continue to grow compounded on a tax-deferred basis. Those Who Have Inherited IRAs Are Able to Name Their Own Beneficiaries for Those Accounts. The individual who initially inherited the IRA can stretch out the life of the account by taking RMDs, and if they die before depleting the account the named successor beneficiaries will complete the original beneficiary s single-life (term-certain) expectancy. You should learn more about a Stretch IRA if you answer true to any of the following statements: I do not need the income from my IRA during my lifetime I want to withdraw as little as possible from my IRA once I reach my Required Beginning Date. (Required Beginning Date is April 1 of the year after the year the IRA owner reaches age 70½) My spouse will not need to use all of my IRA assets during his or her lifetime I want to control taxes on my IRA withdrawals as much as possible I want to leave a legacy to my family

2 Now, let s review the following possible scenarios for stretching out your IRA: 1. Spouse Beneficiaries. An IRA owner names his or her spouse as the sole IRA beneficiary to provide for the spouse s financial needs after the IRA owner s death. This approach generally avoids probate and may qualify for the unlimited marital deduction, eliminating estate tax. An Inherited/Beneficiary IRA may be set-up for the benefit of a spouse under age 59 ½ who may need to take distributions from the IRA. This strategy will avoid the 10 percent premature distribution penalty but the surviving spouse will pay all income taxes owed on any distribution. The surviving spouse would be required to take RMDs by December 31 of the year following the IRA owner s year of death using Single Life Table with Recalculation based on surviving spouse s age each year. This rule is only if the deceased spouse had reached age 70½. If the surviving spouse is the sole primary beneficiary, and the deceased spouse was not yet 70½ that spouse may defer RMDs until the year when the IRA owner would have reached age 70½. Until that time, you may take distributions from the Inherited IRA in any amount and at any time. After you reach age 59½, you will likely want to roll over the IRA to your own. The Traditional IRA rules would then apply. The following options are also available to a surviving spouse, whatever the age of the IRA owner at death: The surviving spouse can claim the IRA as his or her own and roll it over to a new or existing IRA in their name if that spouse is the sole IRA beneficiary. Their RMDs would then begin the year following the year they turn 70½ based on their own age using the divisor found on the Uniform table. The spouse may also take a lump-sum distribution from the IRA. The distribution will be fully taxable in the year it is received. A portion of any distribution would be exempt from taxation subject to the Pro-Rata rules if the IRA owner made non-deductible contributions or rolled after-tax money into the IRA. Finally, in cases where the spouse does not need or want the IRA assets, he or she can exercise a qualified disclaimer within nine (9) months after the IRA owner s death. This will result in the spouse giving up his or her right to all or a portion of the IRA assets. The assets would then flow to the contingent beneficiaries who would benefit from the disclaimer. The disclaimed assets would go to the individual specified under the default rules in the IRA custodial agreement in cases where no contingent beneficiary is named. The defaults on a FCC IRA are first a surviving spouse, second children and third estate. Qualified disclaimers can offer you enhanced planning opportunities when considering use of a Stretch IRA. As always, you should consult your tax and legal advisors for advice about disclaimers. The surviving spouse should take care to name beneficiaries for their IRAs in cases where they elect to continue the IRA through an Inherited/Beneficiary IRA, or roll over the inherited IRA into his or her own IRA. Keep in mind that to maximize planning flexibility, both primary and contingent beneficiaries should be named.

3 2. Non-Spouse Beneficiaries. The Stretch IRA concept may still be helpful if an investor is single, is divorced, or feels that his or her spouse does not need the IRA assets. In each of these instances, if the IRA owner designates a younger, non-spouse beneficiary, several goals can be accomplished. First, the beneficiary can take distributions based on non-spouse options. Second, since many beneficiaries will be significantly younger than the IRA owner, the RMDs after the IRA owner s death will be minimized, potentially stretching out the life of the IRA. Let s discuss these points in more detail: A non-spouse beneficiary CANNOT roll over IRA assets to an IRA or retirement plan titled in their own name at the death of the IRA owner. The non-spouse IRA beneficiary MUST continue to maintain the IRA in the name of the deceased owner as a Beneficiary or Inherited IRA. Any other process will be viewed as a distribution by the IRS and will result in the IRA being fully taxable, ending any deferral opportunities. *Special Note: The Pension Protection Act of 2006 (PPA, 2006) offers good news for nonspouse beneficiaries of qualified retirement plans (401(k), 403(b), 457 plans, etc.) Beginning January 1, 2007, non-spouse beneficiaries of such plans are able to request that a direct transfer of these inherited plan assets be made to an Inherited IRA. You will need to contact your Wachovia Securities Financial Advisor to establish an Inherited IRA account. You will then need to contact the plan sponsor for their help in executing the transfer of the assets into your Inherited IRA. NOTE: ONLY a direct transfer is allowed. This is a non-taxable distribution from the qualified plan that is sent directly to the new Custodian and will be reported to the IRS as a rollover. Failure to employ the direct transfer process could make this transaction fully taxable to the beneficiary and end the tax-deferral available under the Inherited IRA. This new option could help benefit you and your family by allowing the features of a Stretch IRA previously unavailable to non-spouse beneficiaries of a qualified plan. By executing the direct rollover you could enjoy continued tax-deferred compounding, only annual required minimum distributions are mandatory, you can name the beneficiary to your Inherited IRA and you should enjoy a broader investment selection for your Inherited IRA. Please also remember that Stretch IRAs are designed for investors who will not need the money in the account for their own retirement. There is no guarantee that there will be assets remaining in the account at the time of the IRA owner s death. Please investigate all the options for handling your inheritance of qualified assets with you tax and legal advisors before executing a strategy. Now, let s continue to focus on the options a non-spouse IRA beneficiary may consider. The non-spouse IRA beneficiary may take a lump-sum distribution from the IRA. The distribution would be fully taxable in the year it is received. A portion of any distribution would be exempt from taxation subject to the Pro-Rata rules if the IRA owner made nondeductible contributions or rolled after-tax money into the IRA.

4 RMDs to a non-spouse beneficiary may be made over the beneficiary s single life (termcertain) expectancy, if an IRA owner dies before or after his or her required beginning date. If the beneficiary does not take a distribution in the year following the IRA owner s death and the IRA holder dies before their Required Beginning Date, distributions must be made under the Five-Year Rule. Under this rule, the entire IRA must be distributed by the end of the fifth year following the year of the IRA owner s death. The use of a qualified disclaimer is also available to a non-spouse beneficiary if he or she wishes to relinquish any or all rights to the inherited IRA assets. The disclaimer must be exercised within nine (9) months of the death of the IRA owner. 3. Multiple Beneficiaries. Some thought should be given to the following matters for those with multiple primary beneficiaries: During the gap period (the time between the IRA owner s death and December 31 of the year after that death), beneficiaries may elect to set-up separate Inherited/Beneficiary IRA accounts. Each beneficiary will then have his or her own Inherited IRA maintained in the name of the deceased IRA owner. Required minimum distributions (RMDs) will be calculated separately for each beneficiary using that beneficiary s single life (term-certain) expectancy. Term certain means that the beneficiary s life expectancy will be reduced by one for each later year of distribution. The advantages of this approach are that each beneficiary can make his or her own investment decisions and stretch the IRA by using their individual life expectancy. This technique also allows the individual to name their own successor beneficiaries. RMDs must be calculated using the single life (term-certain) expectancy of the oldest beneficiary if the IRA is not divided into separate accounts for each beneficiary by December 31 the year following the year of the IRA owner s death. This approach increases the amount of the distribution and reduces one s ability to stretch out the life of the IRA. Stretch IRA Total IRA Distributions Over Beneficiaries Lifetime Age Life Value of IRA When Inherited by Beneficiary Expectancy $100,000 $500,000 $1,000,000 Total Projected Distributions yrs 1,740,307 8,701,264 17,402, yrs 1,045,316 5,226,414 10,452, yrs 640,394 3,201,872 6,403, yrs 407,695 2,038,414 4,076,824 Assumptions: Required minimum distributions withdrawn, 7% annual return. This chart is hypothetical and is provided for informational purposes only. It is not intended to represent any specific investment. The chart above will help you understand the potential importance IRA planning can have for your family. A beneficiary who chooses wisely may avoid paying income taxes on an Inherited IRA all at once, and stretch distributions over his or her lifetime.

5 4. Trust, Charity or Estate as Beneficiary. When a trust is named as the IRA beneficiary and the trust meets certain IRS requirements, RMDs will be based on the age of the oldest trust beneficiary s single-life (term-certain) expectancy. A lump-sum distribution is also available when a trust is named as IRA beneficiary. If the IRA owner dies before his or her required beginning date, distributions may be taken under the Five-Year Rule explained previously. Again, proper planning of the trust beneficiaries can stretch out payment of the IRA assets. When a trust that does not meet IRS requirements of a look-through trust, charity or estate is named as the IRA beneficiary, the options for extending the life of the IRA are limited to the remainder of the IRA owner s single life (term-certain) expectancy, if the IRA owner died after his or her required beginning date. Otherwise, distributions must be made under the Five-Year rule discussed previously. At Wachovia Securities, we understand your desire to maximize the benefit your family receives from your IRA. Please contact your Financial Advisor for further information on your Stretch IRA options. We look forward to helping you and your family build your financial future. Securities and insurance products: not insured by fdic or any federal government agency may lose value not a deposit of or guaranteed by a bank or any Bank affiliate Wachovia Securities does not provide tax or legal advice. Be sure to consult with your own tax and legal advisors before taking any action that may have tax consequences. Wachovia Securities is the trade name used by two separate, registered broker-dealers and nonbank affiliates of Wachovia Corporation providing certain retail securities brokerage services: Wachovia Securities, LLC, member NYSE/SIPC, and Wachovia Securities Financial Network, LLC, member NASD/SIPC Wachovia Securities 07/