Published: September 21, 2008 12:02 am      

Stretch out your IRA

After years of saving, you’ve accumulated significant wealth in your Individual Retirement Accounts (IRA). So, what do you do next? You may want to think about extending the life of your IRA by stretching out its tax deferral over your life and the lives of your children and grandchildren. 

Although it is one of the most widely overlooked aspects of these retirement savings accounts, a properly structured beneficiary designation could extend the stretch-out of income tax deferral on your IRA assets for years after your death. Even though your beneficiaries will be required to take annual minimum distributions after your death, your IRA assets can continue to enjoy tax-deferred accumulation. 

In order to successfully enhance your IRA’s future potential, you will need to consider the possible threats to your IRA so you can take steps to guard against them.  When you reach the age of 70 ?, you must start taking distributions – generally called required minimum distributions (RMDs) – from your traditional IRAs. RMDs can produce two undesirable results.  First, they can reduce the amount of assets available to accumulate tax deferred. And, second, they can trigger income taxes on distributed amounts. 

To reduce the effects of RMDs on your IRA, consider converting your traditional IRA to a Roth IRA if you meet the eligibility requirements. Converting to a Roth IRA does not avoid income tax. In fact, you must pay income tax on the amount you convert for the year of conversion. However, once converted, assets in a Roth IRA won’t face future RMDs during your lifetime.  Remember, that you do not need to convert your entire traditional IRA balance at once.   So, you may want to convert portions of your traditional IRA balance over several years.  If you are age 70 or older, you cannot convert your current year’s RMD. You must take it before converting any remaining balances.  

To be eligible to convert, your modified adjusted gross income (MAGI) in the year of conversion cannot exceed $100,000 whether you file a single or joint tax return. Keep in mind that the income from taking your RMDs is not counted toward the $100,000 eligibility threshold.

In order to further protect your IRA assets, you may also want to consider an insurance policy or a trust. A life insurance policy’s death benefit can provide necessary liquidity to pay estate taxes so your IRA can remain intact for your heirs.  Designating a trust as the IRA beneficiary can help you ensure that a spendthrift beneficiary will not destroy the stretch benefits of the IRA by cashing it all out.

Your financial advisor can provide a customized Retirement Distribution Analysis to help you plan for the potential growth and distribution of your IRA. The Retirement Distribution Analysis can address RMDs during your lifetime, IRA stretch-out distributions for your beneficiaries and common retirement planning strategies.

Wachovia Securities does not give tax or legal advice.

 

This article was provided by Gerry Mitchell, Financial Advisor in the Wachovia SecuritiesMeridian, Miss., branch. Gerry Mitchell can be reached at (601)483-3355. Wachovia

Securities, LLC, member NYSE/SIPC, a registered broker-dealer and a separate nonbank affiliate of Wachovia Corporation.