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The Short Version
This page will review the essential points made on the IRA Distributions and IRA Stretch and Protection Trust pages as well as an example. It is for those of you that don't need or want the long technical version that sounds like it was written by a tax attorney that needs to get out more often. Start with The Essential Points to your right then review the example below. If you have questions feel free to contact us.
Your Personalized Retirement Distribution Analysis
Please contact us (through our information request form) to request a complimentary custom IRA distribution analysis. You can preview a sample analysis here: Sample Retirement Distribution Report.
The Example - Summary Chart
The following chart summarizes the differences in distributions under each of the four alternatives in our example below. The most significant advantages are obtained in Alternative 3 or Alternative 4, which each illustrate the stunning importance of retirement distribution planning for IRAs by way of the IRA Stretch and Protection TrustSM.
| Alternative 1 | Alternative 4 | |||||||
| Spousal | Alternative 2 | Alternative 3 | IRA Stretch and | |||||
| Rollover then | Lifetime Dist. | IRA Stretch | Protection Trust - | |||||
| Total Value | Immediate | - Oldest | and | Grandchildren | ||||
| Received By: | Payout | Beneficiary | Protection Trust | 7.5% each | ||||
| Mike Smith | $255,222 | $255,222 | $255,222 | $255,222 | ||||
| Betty Smith | $190,696 | $190,696 | $190,696 | $190,696 | ||||
| Ann | $94,581 | $195,059 | $195,059 | $136,543 | ||||
| Bill | $94,581 | $195,059 | $210,483 | $147,333 | ||||
| Frank | $94,581 | $195,059 | $236,234 | $165,365 | ||||
| Julie | $94,581 | $195,059 | $279,524 | $195,662 | ||||
| Eddy | $0 | $0 | $0 | $163,642 | ||||
| Janice | $0 | $0 | $0 | $172,007 | ||||
| Tina | $0 | $0 | $0 | $202,230 | ||||
| Joe | $0 | $0 | $0 | $265,845 | ||||
| Total | $824,242 | $1,226,154 | $1,367,218 | $1,894,545 | ||||
| Difference | --- | 48.76% | 65.88% | 129.85% | ||||
The Example - Background Information
The example is based on the imaginary Mike Smith, who owns an IRA account presently worth $250,000. He was born on 1/31/1942 and is married to Betty, born on 1/1/1945. They have four children, Ann (born 1966), Bill (born 1968), Frank (born 1971) and Julie (born 1975). They also have four grandchildren, Eddy (born 1989), Janice (born 1990), Tina (born 1993) and Joe (born 1998).
Because he has not yet turned 70 1/2, Mike has not started to withdraw Required Minimum Distributions (or "RMDs") from his IRA. We expect that Mike will die in 2027, at which time Betty will complete a spousal rollover and continue to take RMDs until her death in 2034.
Our example assume that account investments will grow at 7% and that all distributions (whether to the original account owner or a beneficiary) will be subject to a marginal income tax rate of 28%.
Alternative 1: Spousal Rollover then Immediate Payout
This alternative is the most likely scenario. It is what will happen if Mike and Betty take their own minimum required distributions during their lives and then simply name their children as beneficiaries of the IRA failing to make any other IRA distribution plan. Once Mike and Betty have both passed, their children (here equal beneficiaries of the IRA) are likely to each cash out their portion of the inherited IRA. (For more information on why they are likely to do this please see The Creditor and Bankruptcy Risk, The Divorce Risk and The Beneficiary "I Want it NOW!" Risk).
| Mike Smith | Betty Smith | ||||||||
| Retirement Plan: | $250,000 | Retirement Plan: | $515,752 | ||||||
| Distributions 2008 Through 2027: | Distributions 2028 Through 2034: | ||||||||
| Total from Retirement Plan: | $354,474 | Total from Retirement Plan: | $264,857 | ||||||
| Income Taxes Paid: | $99,252 | Income Taxes Paid: | $74,161 | ||||||
| Total Net Distributions: | $255,222 | Total Net Distributions: | $190,696 | ||||||
| Heirs | |||||||||
| Retirement Plan: | $525,448 | ||||||||
| Other Assets: | $246,636 | ||||||||
| Distributions 2035 Through 2035: | |||||||||
| Ann | $131,362 | ||||||||
| Bill | $131,362 | ||||||||
| Frank | $131,362 | ||||||||
| Julie | $131,362 | ||||||||
| Total from Retirement Plan: | $525,448 | ||||||||
| Income Taxes Paid: | $147,124 | ||||||||
| Total Net Distributions: | $378,324 | ||||||||
In this alternative, the total net distributions to Mike Smith and his family members is $824,242. It doesn't appear to be bad considering that he started with a $250,000 IRA, but as will be seen below his family has completely lost the chance at a lifetime of tax deferred stretch IRA distributions.
Alternative 2: Stretch IRA Distributions Over the Life of the Oldest Beneficiary
This alternative often occurs where someone names a class of beneficiaries (such as "our children") and for various reasons the oldest member of the class is the lifetime that all beneficiaries must use for calculating minimum distributions. This alternative assumes that the four children do actually leave the IRA intact (an unlikely scenario) and only take required minimum distributions over Ann's lifetime.
| Mike Smith | Betty Smith | ||||||||
| Retirement Plan: | $250,000 | Retirement Plan: | $515,752 | ||||||
| Distributions 2008 Through 2027: | Distributions 2028 Through 2034: | ||||||||
| Total from Retirement Plan: | $354,474 | Total from Retirement Plan: | $264,857 | ||||||
| Income Taxes Paid: | $99,252 | Income Taxes Paid: | $74,161 | ||||||
| Total Net Distributions: | $255,222 | Total Net Distributions: | $190,696 | ||||||
| Heirs | |||||||||
| Retirement Plan: | $525,448 | ||||||||
| Other Assets: | $246,636 | ||||||||
| Distributions 2035 Through 2052: | |||||||||
| Ann | $270,914 | ||||||||
| Bill | $270,914 | ||||||||
| Frank | $270,914 | ||||||||
| Julie | $270,914 | ||||||||
| Total from Retirement Plan: | $1,083,656 | ||||||||
| Income Taxes Paid: | $303,420 | ||||||||
| Total Net Distributions: | $780,236 | ||||||||
In this alternative, the total net distributions to Mike Smith and his family members is $1,226,154. This is better than the above example, but still not as good as things could get. Moreover, this example is fictional in that it assumes none of the beneficiaries will cash out the inherited IRA and that each will actually elect to take lifetime stretch distributions.
Alternative 3: Stretch IRA Distributions Over the Life of Each Beneficiary
This alternative demonstrates the power of the IRA Stretch and Protection TrustSM. Here, once Mike and Betty both pass away, each beneficiary can take his or her lifetime of required minimum distributions using his or her own life expectancy. Additionally, because the IRA Stretch and Protection TrustSM was used, the beneficiaries cannot compel early distributions and can only sit back and enjoy the lifetime of tax deferred distributions their parents have provided for them.
| Mike Smith | Betty Smith | ||||||||
| Retirement Plan: | $250,000 | Retirement Plan: | $515,752 | ||||||
| Distributions 2008 Through 2027: | Distributions 2028 Through 2034: | ||||||||
| Total from Retirement Plan: | $354,474 | Total from Retirement Plan: | $264,857 | ||||||
| Income Taxes Paid: | $99,252 | Income Taxes Paid: | $74,161 | ||||||
| Total Net Distributions: | $255,222 | Total Net Distributions: | $190,696 | ||||||
| Heirs | |||||||||
| Retirement Plan: | $525,448 | ||||||||
| Other Assets: | $246,636 | ||||||||
| Distributions 2035 Through 2060: | |||||||||
| Ann | $270,914 | ||||||||
| Bill | $292,335 | ||||||||
| Frank | $328,102 | ||||||||
| Julie | $388,224 | ||||||||
| Total from Retirement Plan: | $1,279,575 | ||||||||
| Income Taxes Paid: | $358,275 | ||||||||
| Total Net Distributions: | $921,300 | ||||||||
Here, the total net distributions to Mike Smith and his family members is $1,367,218. This alternative demonstrates both the power of the IRA Stretch and Protection TrustSM. We see that with it each beneficiary can only take his or her required minimum distribution but cannot compel an early distribution. Moreover, because of the IRA Stretch and Protection TrustSM each beneficiary enjoys the significant advantage of using his or her own life expectancy when taking a required minimum distribution. Note that in this example Ann receives the same amount as in Alternative 2, but each of the younger beneficiaries (who now enjoy longer tax deferral) will receive higher payouts from their own portion of the inherited IRA.
Alternative 4: Stretch IRA Distributions over the Life of Each Beneficiary - Grandchildren 7.5% Beneficiaries
This alternative is similar to Alternative 3 in that an IRA Stretch and Protection TrustSM ensures that each beneficiary takes only his or her required minimum distribution and that those distributions are calculated with reference to each of their own life expectancies. However, now each of the grandchildren are also beneficiaries of the inherited IRA after Betty passes away. In this alternative each grandchild is a 7.5% beneficiary while the children are equal beneficiaries of the remaining balance (therefore 17.5% each).
| Mike Smith | Betty Smith | ||||||||
| Retirement Plan: | $250,000 | Retirement Plan: | $515,752 | ||||||
| Distributions 2008 Through 2027: | Distributions 2028 Through 2034: | ||||||||
| Total from Retirement Plan: | $354,474 | Total from Retirement Plan: | $264,857 | ||||||
| Income Taxes Paid: | $99,252 | Income Taxes Paid: | $74,161 | ||||||
| Total Net Distributions: | $255,222 | Total Net Distributions: | $190,696 | ||||||
| Heirs | |||||||||
| Retirement Plan: | $525,444 | ||||||||
| Other Assets: | $246,636 | ||||||||
| Distributions 2035 Through 2081: | |||||||||
| Ann | $189,641 | ||||||||
| Bill | $204,629 | ||||||||
| Frank | $229,675 | ||||||||
| Julie | $271,752 | ||||||||
| Eddy | $227,285 | ||||||||
| Janice | $238,893 | ||||||||
| Tina | $280,874 | ||||||||
| Joe | $369,228 | ||||||||
| Total from Retirement Plan: | $2,011,977 | ||||||||
| Income Taxes Paid: | $563,350 | ||||||||
| Total Net Distributions: | $1,448,627 | ||||||||
In this final alternative, the total of distributions to Mike Smith and his family members is $1,894,545. With each grandchild also inheriting a portion of the IRA, Mike and Betty have blessed their family with over $500,000 in additional IRA distributions over the lifetimes of their children and grandchildren creating A Lifetime of WealthSM for each of them.
The Essential Points
- Tax deferral is a good thing - the longer an IRA or other tax advantaged investment stays in a tax deferred account the better.
- Retirement accounts (IRA, 401(k), 403(b), etc.) provide a means of tax deferred retirement savings. They are like an interest free loan; you don't have to give the government its portion of each dollar in the account until you withdraw your portion of that dollar.
- Someday (usually when you turn age 70 1/2) the tax deferral party ends and the funds in a retirement account have to be paid out.
- Once distribution start a minimum amount (the "Required Minimum Distribution" or RMD) must continue to be withdrawn each year.
- After you die a spouse beneficiary can complete a rollover and treat the IRA as his or her own.
- A non-spouse beneficiary cannot make a rollover.
He or she can either:
- Take RMDs (tax deferred distributions) over his or her own lifetime (often called stretch IRA distributions); or
- Completely withdraw the IRA, pay all deferred taxes and lose the opportunity for a lifetime of tax deferred distributions.
- A beneficiary's RMD is calculated with reference to the beneficiary's life expectancy at the time the IRA is inherited.
- Left to their own decision, divorce or the claims of creditors, most non-spouse IRA beneficiaries will completely withdraw the IRA and lose the opportunity for the lifetime of stretch IRA distributions.
- The IRA Stretch and Protection TrustSM is a planning strategy that utilizes a trust to ensure that while beneficiaries receive their RMDs, they cannot fully withdraw the IRA and lose the lifetime stretch IRA distributions.
- The magnitude of the benefit of stretch IRA distributions is stunning. The example to the left demonstrate the power of this strategy. It is the difference between leaving a simple inheritance to your family or leaving them with A Lifetime of WealthSM.