Stretch your Inherited IRA
Before you learn about stretching your Inherited IRA, you need to understand IRA basics. IRAs have been around for years.
Traditional IRAs allow you to invest a certain amount of before-tax earnings on a yearly basis. That reduces your current taxes because you don’t pay taxes on that money until you actually take it out later. The main benefit of your IRA is that it grows more quickly because you aren’t taking money out to pay taxes.
Company retirement programs like 401(k)’s work similarly. Sometimes companies will match a portion of their employees’ contributions, dramatically increasing the employee’s return. If your company matches any of your contribution make sure you take advantage of it! When you change jobs or retire you can transfer the money from your 401(k) into your own IRA.
Roth IRAs allow you to invest after-tax dollars, but the earnings on a Roth IRA are never taxed. You aren’t required to start taking money out of a Roth IRA at age 70 ½ as in a traditional IRA.
The following is an example of how “stretching” a IRA can turn thousands of dollars into many millions of dollars.
Assume, you are 30 years old and you contribute $4000 per year to an IRA or company retirement program. If you continue to do so until you are 65, you will accccumulate over a $1 million if you earned 10% per year.
Assume you take 5% ($50,000) out each year to live, but you pass away at the age of 80. Your Roth IRA is still earning 10% Your IRA would be worth over $2 million. Your daughter inherited your IRA. She is 50 years old.
Your daughter has the option of leaving the IRA money in your name. She would start taking money out each year based on her life expectancy and pay taxes on that, but the rest could continue to grow tax-deferred. If your daughter's life expectancy is 30 years when you passed away, she could continue your IRA and would only have to take out 1/30th each year.
This means the $2 million can continue to grow tax-deferred for another 30 years! Let’s assume it continues to earn 10% and that she takes out 5% ($100,000) each year. Thirty years down the road, the IRA the daughter inherited IRA from you will have grown to over 9 MILLION DOLLARS!
This happened to a CPA Mom's client. The clients’s daughter inherited her father's IRA valued at $150,000. She was told, by her "then" CPA, she had to take all the money out of the IRA at once. When she did, it ended up costing her $45,000 in taxes!
This CPA Moms "stretching" information could have saved a lot of money on inherited IRAs.