Laura F. Berra, CFP® and Associate Vice President-Investment Officer of The Anthony-Berra-Griffin Wealth Management Group of Wells Fargo Advisors in Raleigh.
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 typically 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 70½, 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. Beginning in 2010, eligibility requirements for Roth conversion have been eliminated. Converting to a Roth IRA does not avoid income tax. In fact, you must pay income tax on the taxable amount you convert for the year of conversion. The year 2010 provided an exception to this. If you converted in 2010, you can spread the income due to the conversion evenly over your 2011 and 2012 tax returns, at income tax rates applicable to those years. [Please note: Taxes due in regard to a Roth Conversion may be accelerated if a distribution is taken before 2012, please consult your tax advisor for more information.] Or, if you choose, you can opt to include the total taxable amount of your 2010 conversion on your 2010 tax return. Once converted, assets in a Roth IRA won’t face future RMDs during your lifetime. Additionally, Roth IRAs offer tax-free growth, if certain criteria are met at the time of distribution. 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 70½ or older, you cannot convert your current year’s RMD. You must take it before converting any remaining balances.
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 Stretch IRA Strategy Analysis to help you plan for the potential growth and distribution of your IRA. The Stretch IRA Strategy Analysis can address RMDs during your lifetime, IRA stretch-out distributions for your beneficiaries and common retirement planning strategies.
Wells Fargo Advisors does not give tax or legal advice. Investments in securities and insurance products are not FDIC-insured, not bank-guaranteed and may lose value. Wells Fargo Advisors, LLC, Member SIPC, is a registered broker-dealer and a separate non-bank affiliate of Wells Fargo & Company.