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Stretching Your IRA Balance Out

January 20, 2011

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With the increased limits for individual retirement account contributions and the ability to roll over 401(k) balances to an IRA when leaving a job, many investors have significant IRA balances. Thus, IRAs are becoming more than just retirement planning vehicles. Click “Full Article” to see how they are also estate planning tools for investors who won’t use the entire balance during their lifetimes.

With the increased limits for individual retirement account (IRA) contributions and the ability to roll over 401(k) balances to an IRA when leaving a job, many investors could have significant balances.

As a result, IRAs are becoming more than just retirement planning vehicles. They are also estate planning tools for investors who won’t use the entire balance during their lifetimes. IRAs have become even more attractive as estate planning tools under the Treasury Department’s distribution rules.

There are ways to help stretch your IRA balance if you want to benefit your heirs. Suppose you have a large traditional IRA balance, which includes a rollover from your 401(k) plan. You don’t have to start taking distributions until age 70 1/2. After that, you must start taking minimum distributions based on your age.

When you die, you can leave the IRA to your spouse, who can roll the balance over to his or her IRA and can name his/her own beneficiary, perhaps your children or even grandchildren. Your spouse can delay taking distributions until age 70 1/2.

When your spouse dies, your children inherit the IRA, which can be divided into separate IRAs for each child. Each child can then take distributions based on each of their life expectancies and can name their own beneficiaries. This process can continue to repeat as long as there are funds in the IRA. By taking only minimum distributions when required, the balance can continue to grow on a tax-deferred basis for years and even decades.

You can further expand this concept by converting your traditional IRA to a Roth IRA if you meet the income requirements.

Although you will have to pay income taxes on any amounts that would have been taxable when withdrawn (for example, contributions and earnings in a traditional IRA and earnings in a nondeductible IRA), you can pay the income taxes from funds outside the IRA, leaving the account balance untouched. You then would not have to make any withdrawals during your life.

Since your spouse can roll the balance over to his or her own Roth IRA, he or she also would not have to take withdrawals during his or her lifetime. When your spouse dies, your heirs would then have to take distributions over their life expectancies, but those distributions would be federal income tax free, provided the distributions occurred after the five-tax-year holding period.

Of course, you shouldn’t lose sight of the fact that your IRA’s main purpose is to fund your retirement. An IRA should only be used for estate planning purposes if it isn’t needed for your retirement.

For more information contact QPAC at [email protected].

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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