I am in my early 20’s and most of my fellow investor colleagues consider me very young for the real estate game. Knowing that I’m starting earlier than most, I want to be ahead of the game financially and with that comes planning and preparation, especially with IRA’s and taxes. With that being said I’ve been doing a lot of reading on the power of IRA’s and Tax Protection and just finished reading a wonderful book by Ed Slott, How to Parlay your IRA into a Family Fortune.
The Main Idea of the Book:
You can “Parlay for your IRA into a Family Fortune” by setting up your Roth IRA to be given to a beneficiary (typically someone that is younger than you such as a child or a younger spouse) which allows something called a “stretch”. The beneficiary can continue to make contributions to the IRA growing and building your original retirement based on their life expectancy according to the IRS, tax free, taking only the minimum distribution the entire time.
Let’s use an example from the book to make this a little more clear.
“Bob” leaves his 39 year old daughter, his beneficiary, a 1.5 million Roth IRA. Because of his daughters current age, the IRS says she has a life-expectancy for 43.6 years remaining to contribute to that IRA before the required withdrawal date. Now Bob was no dummy, he planned for this day properly, ensuring that the structuring of his estate and IRA allowed maximum growth and minimum tax payments (if he did not set this up before his death it would have been left to his estate and a large portion of his IRA would have gone to paying estate taxes). His daughter then inherits this money 100% tax free because of his structuring and now has the ability to continue growing that wealth by self-directing it getting a 8% return (which let’s be honest is a very feasible return this day in age). By the end of her 43.6 year life expectancy she grew the 1.5 million inherited IRA into $11,903,767 all tax free while slightly increasing her annual income taking the required minimum distributions! Talk about the power of growth!
Okay, you’re probably thinking “well I don’t have 1.5 million in an IRA for my kids”, but the major point Ed Slott is trying to make in this book is the that the power of time, growth, and compounding interest work just as well in an IRA that is stretched with $100,000 or $1,000,0000. It’s tax free growth regardless!
In order to be able to STRETCH your IRA to maximize growth and contribution limits and minimize taxes you need to:
1. Get a ROTH IRA (you can do this by rolling over an existing IRA, 401K, or other traditional investment plan or if time allows, starting one while you are young).
- Check with your IRA custodian to ensure they allow stretch IRA’s and can set up everything needed prior to your death to allow the stretch.
2. Name a Beneficiary to each ROTH IRA you own. This can be 1 person or multiple but discuss with your custodian the proper way to do this.
- There are a number of suggestions he gives in the book on this topic, and it is highly suggested that you keep your IRA beneficiary forms updated as much as possible in the event of death, divorce, or other circumstances. If this form is in existence after death, it supersedes your will and all of your IRA will be given to the beneficiary, hence the reason you want to keep it updated as best as possible.
3. Provide instructions and incentives to your beneficiaries to ensure they maximize this opportunity after you pass.
- You cannot control if your beneficiary takes advantage of the wealth building opportunity you provided to them or not, but you can however provide them incentives and the tools to utilize and maximize the stretch. Leaving them explicit instructions on what steps to take to properly stretch the IRA with a chart showing the possible growth vs. taking the money and paying 30% or more in taxes upfront.
Now I am not expert in this area, nor am I an accountant, lawyer, estate planner, or IRA advisor, so I highly suggest if you are interested in what you read here that you pick up your own copy of the book and explore the many details, laws, and regulations that were not discussed in detail. The book is extremely well written and easy to understand. It makes learning about growing your wealth enjoyable and exciting! I hope this blog helps you take the right step toward parlaying your IRA into a family fortune!