Stretch Your Retirement Savings for the Next Generation with a Stretch IRASubmitted by Reby Advisors | Certified Financial Planners | Danbury, CT on May 19th, 2017
If you want to make your retirement savings plan even more valuable, consider establishing a stretch IRA as part of your estate-planning process. A stretch IRA allows your designated heirs, typically your children, to inherit your IRA and take the money out over time instead of as a lump sum.
That simple change may sharply reduce their tax bill and give the IRA assets more time to grow and compound. When executed properly, a stretch IRA is a win-win: heirs end up getting a greater lifetime inheritance, and send a smaller percentage of it on a one-way trip to Washington D.C.
Here is a simple example:
Let's say your son earned a $100,000 per year salary. He pays 28% of each additional dollar he earns in taxes, and he can add up to $91,650 in annual income without moving into the next tax bracket and paying a higher percentage of his income to the government. However, a large windfall inheritance that puts his income over $418,400 would push him into the maximum 39.6% tax bracket. Inheriting the stretch IRA may allow him to remain in the 28% tax bracket instead of moving up to 39.6% in the year he receives the inheritance.
Setting up a stretch IRA can be complicated, so make sure to contact your advisor or estate planning attorney about doing it the right way. For reference, here’s a good article from Forbes.com with 7 mistakes to avoid: https://goo.gl/82zDi7
How “James” Used a Stretch IRA (Case Study)
“James," a 56-year-old man, wanted to retire within four years. He felt that he was at a point in his financial life where he "could not afford to make a mistake" and wanted confirmation that he could, in fact, retire at age 60.
Specifically, he wanted to make sure that he'd be able to maintain his current lifestyle and have enough money to retire without putting his family goals at risk. Like many successful parents, one of his goals that he wanted to solidify was leaving a financial legacy to his kids.
A stretch IRA was part of the comprehensive wealth plan we developed with James. As a result, we estimate that his kids will ultimately get 3 – 4 times more money over their lifetime and pay less in taxes.
To read the full case study and how James benefited from the financial planning process, click here to download the PDF.
Set up Your Stretch IRA
If you’re interested in a stretch IRA or other strategies to achieve your goals for yourself or your children, please do not hesitate to contact us: (203) 790-4949.