Leaving a Legacy of Income


ReShelle Barrett, CFP®

Are you over age 70 ½ and being forced to take income from your IRA? Wouldn’t it be nice if you could spread that income over future generations?   Fortunately, you can.

Let’s start with determining when you need to start taking Required Minimum Distributions (RMDs). The IRS allows retirement accounts to grow tax-deferred throughout working years. At the age of 59 ½ you have the option to begin taking distributions from your account without the 10% early tax penalty. However, the year you reach 70 ½ you are required to begin taking minimum withdrawals – RMDs.   You must do this by December 31st each year. For example, if your birthday is April 10, 1947 you must begin your withdrawals by December 31st of 2017 (since you will be 70 ½ on October 10, 2017). The first year you can wait until April 1, 2018 but you must still take your 2018 RMD by December 31, 2018. This would force two RMD’s in 2018 which may not feasible for income tax purposes.

The amount of RMD is based in part on life expectancy and in part on the prior year-end value of your retirement accounts so the RMD changes from year-to-year. Penalty on any shortfall is a whopping 50% so it’s recommended IRA owners pay attention to the calculation each year.

With relatively recent changes in RMD rules, IRA owners have the ability to change their beneficiary even after RMD’s have begun. This provides an excellent estate planning tool sometimes called a “Stretch IRA”. It allows you to spread the income not only over your lifetime but over your beneficiary’s lifetime(s) as well.

Let’s look at an example. Joe is married and decides to rollover his 401(k) after 40 years of work. He begins taking required minimum distributions at age 70 ½ based on an IRS Life Expectancy Table factor of 27.4 years. Joe passes away in 10 years at the age of 80 after taking 10 distributions.

Joe’s wife Anna age 76 then transfers the account to her own IRA Rollover and begins taking distributions on her factor which is 22 years. When she passes away at the age of 85, she has taken 10 distributions.

Their daughter, Sarah, who is age 53 then rolls over the account to a beneficiary IRA and thus begins distributions based on her own life expectancy factor of 31.4 years. After Sarah has taken distributions for 25 years, she passes away and leaves the account to her son, John (third generation). Although he could take the money out all at once, he decides to leave it in the IRA and distribute it over the next seven years. Joe, Anna, Sarah and John all took the minimum distribution thereby leaving more money to grow tax-deferred and deferring the income taxes as well. All told, the income of Joe’s IRA has spanned 52 years and three generations.

As you can see, Joe has not only left a legacy of income but has also deferred the payment of income taxes on his IRA for a long time. With a little planning, your IRA can help take care of the ones you love – even after you are gone. Be sure to talk with your investment advisor to ensure your current IRA has the flexible beneficiary option. As an estate planning tool, this can allow you to save thousands of dollars now and allow future generations to save even more.

ReShelle L. Barrett, CFP®

Contact ReShelle L. Barrett, CFP®

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107 Mt. Nebo Pointe
Suite 200
Pittsburgh, PA 15237
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Mt. Lebanon, PA 15228

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