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How to stretch an inherited IRA

 


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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.

  • How to transfer a retirement account
    Make sure you know where you intend on moving your money in advance!
    As you probably know, an individual retirement account requires that you decide where your money is going to be invested in order to...
  • The tax ramifications of an inherited Roth IRA
    "Be sure to read the fine print." It's neither complex, nor profound advice. Yet, it isn't easy advice to follow when you are navigating your way through pages of IRS rules and regulations governing the...
  • INHERITING IRAs A TRICKY PROCESS
    As the first generation of investors in traditional individual retirement accounts begin to die, an increasing number of surviving spouses or children are inheriting those IRAs. Unfortunately, in the process...
  • Inheriting an IRA: Big Money at Stake
    Thirty years ago, Congress gave Americans a major tax-advantaged retirement savings tool to help us achieve long-range financial goals. Over the years, IRAs (individual retirement accounts) have grown...
  • Converting an Inherited IRA to a Roth IRA
    It depends on who you inherited the IRA from. If you inherited it from your deceased spouse, you may roll over the funds into your own IRA and if you chose, convert your traditional IRA to a new Roth...
  • Inherited IRA Accounts
    What happens if a relative passes away and you suddenly inherit an IRA account? Do you pay tax on the value of the account when you inherit it? Should you just transfer the funds into your own IRA, or...
  • You -- not IRS -- should benefit from inherited IRA
    Handled correctly, an inherited traditional individual retirement account can be a tidy windfall. But if you don't follow IRS regulations to a "T," you could end up paying significant penalties and taxes....
  • Tax Problem Help
    Tax Problem HelpMillions of people every year seek tax problem help. Some of the common tax problems are caused by unpaid taxes, unfilled returns or missing records. Many of the people seeking tax problem...
  • Working or contracting abroad
    Are you heading overseas to find your dream job, or have you been offered an opportunity to work in another country; if so, there are some tax matters to organize and resolve when you take on overseas...
  • Tax Time - Mental Blockage
    Do you get a mental block every time of the year when it is tax time and it is time to face your figures?For many people, tax time means tax block, it's that ongoing aversion to sitting down getting out...