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I’m going to share a
little-known secret that can literally turn a small amount
of money into millions of dollars. It’s all perfectly legal
and is sanctioned by the IRS to boot! I’m talking about the
wonders of “stretching” your Individual Retirement Account
(IRA).
Don’t worry if you haven’t heard of “stretching” your IRA.
Many advisors and even some CPAs aren’t even aware they
exist. But before you learn about stretching an IRA, you
need to understand IRA basics. These retirement savings
plans have been around for years, allowing millions of
Americans to have the benefit of tax-deferral in saving for
their golden 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 benefits are
your savings grow more quickly because you aren’t taking
money out to pay taxes and you should be in a lower tax
bracket when you retire.
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 if you meet some
simple requirements. Additionally, you aren’t required to
start taking money out of a Roth IRA at age 70 ½ like as in
a traditional IRA. This is a significant difference,
especially if you don’t anticipate using all the money.
Now let me give you an example of how “stretching” your IRA
can turn thousands of dollars into many millions of dollars.
Sam is 30 years old and contributes $3500 per year to an IRA
or company retirement program. Doing so until he turns 65,
he would accumulate about $1 million if he earned 10% per
year. That’s great, but we’re just getting started.
Let’s assume Sam then takes 5% out each year to live on
until he passes away 15 years later. Earning 10%, his IRA
would be worth over $2 million. Sam leaves his IRA to his
daughter Rachel who is 50 years old.
Most people, including many CPAs, banks and other financial
advisors assume Rachel would have to take all the money out
of the IRA and pay taxes on it. That could mean a truckload
in taxes, as much as $1 million in this example!
A client recently told me of a friend who this happened to.
The friend’s father left her an IRA valued at $150,000. She
was told 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! I could have saved her this money.
You see, Rachel (and this friend) has the option of leaving
the money in Sam’s IRA under current IRS rules. She would
need to 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 Rachel’s life expectancy
is 30 years when Sam passed away, she could continue his 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! That may not seem that exciting to
you, but let’s do a little math. Let’s assume Rachel
continues to earn 10% and that she takes out 5% each year
(she can take out more than required). Thirty years down the
road, the IRA Rachel inherited from Sam will have grown to
over 9 MILLION DOLLARS!
Imagine being able to pay for your grandchildren’s and
great-grandchildren’s education, helping them purchase a
home or start a business while still meeting your own needs.
That is the power of “stretching” your IRA.
You can “stretch” virtually any IRA, but there are certain
requirements. I’ll discuss those more in a future article.
In the meantime, let me know if you have any questions.
Mr. Voudrie is a Certified Financial Planner, a nationally
syndicated columnist and the President of Legacy Planning
Group, Inc., a Private Wealth Management firm in Johnson
City, TN. He can be reached by calling 1-877-827-1463
toll-free, by email at
jeff@guardingyourwealth.com or by going to
www.guardingyourwealth.com.
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