How to Stretch Your IRA Tax-FREE

Prepared to have your inherited IRA taxed? I will show you a way to build tremendous wealth by 'stretching' an IRA across multiple generations income tax-free! . Guarding Your Wealth" is a nationally syndicated weekly personal finance column written by Jeffrey D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group, a private wealth management firm that employs sophisticated proprietary strategies designed to protect and grow its clients' investments. Please visit our website, www.guardingyourwealth.com to read past articles in our archive.

(PRWEB) May 24, 2004 -- Income taxes are a great inhibitor to building wealth. Ive talked about the power of stretching an IRA across multiple generations and how it can build tremendous wealth. Now, Ill show you how it can be done income tax-free.

Last week I shared a little-known secret of how to legally turn an investment of $3500 per year into millions and millions of dollars. No, it wasnt by winning the lottery! It was through the power of 'stretching an IRA. If you missed it you have to read it under the article archive at www.guardingyourwealth.com.

(Mr. Voudrie responds to questions from readers on an almost daily basis. If you would like clear straightforward unbiased answers to your financial questions, contact Jeff@guardingyourwealth.com)

Most people think that when they inherit an IRA that they have to take all the money out and pay taxes on it right away. But the IRS allows someone who has inherited an IRA to 'stretch it over their life expectancy. They are only required to take out a small portion each year, allowing the rest to continue growing within the account.

In the last article a greatly oversimplified example was used because of space constraints. I used the example of Sam making a $3500 per year contribution to his IRA for 30 years until he retired. After retirement, he started to withdraw 5% per year until he passed away at age 80. His 50 year-old daughter inherited it, continued to withdraw 5% per year and let the rest grow for 30 years. Assuming the account earned 10%, it could have grown to over $9,000,000 by the time she passed away.

Technically, the IRS would require Sams daughter to withdraw money more quickly from Sams IRA. Based on her life expectancy, it would be designed to take the account down to $0 over her lifetime. This changes the amounts. Based on current IRS tables, there would be over $4 million left at her death instead of the $9 million.

The income generated by stretching the IRA is enormous. In the example, the IRA would have provided over $1 million in income to Sam and an additional $11 million in income to his daughter. In other words, the IRA would have generated over $12 million in income and still been worth over $4 million!

In this example, we used a Traditional IRA. A Traditional IRA provides a tax deduction when you put money into it, but then you have to pay taxes on every dollar when you take it out. In our example, assuming a 30% income tax rate, approximately $3,600,000 would have been lost to income taxes! If the remaining money in the account was withdrawn it could result in over $1.2 million in additional taxes. So almost $5 million is lost to income taxes!

If Sam had used a Roth IRA instead he would not have received a tax write-off each year he invested the $3500. On the other hand, there would not be any income tax on the distributions. In other words, the $12 million in distributions plus the $4 million left in the account could have all been used free from income tax! Thats the power of the Roth IRA.

The power to compound your money tax-free is a great way to accumulate wealth. If your money is in a Traditional IRA you may still be able to take advantage of this power by converting it to a Roth IRA. When you do, youll have to pay taxes on the amount taken out of the Traditional IRA. If you are under 59 ½ years old, the IRS waives the normal 10% early withdrawal penalty on the amounts converted.

If you are retired and plan on using the money in your Traditional IRA then it probably doesnt make sense to convert it. If you dont anticipate using it and your children understand the power of stretching your IRA, then converting to a Roth IRA might be beneficial.

You have the flexibility to spread the conversion over several years, allowing you to time the conversion to take advantage of drops in market value or years in which you are in a lower income tax bracket.

The rules surrounding IRAs are complex. For instance, you cant convert a Traditional IRA to a Roth IRA if your Adjusted Gross Income is $100,000 or more. So make sure to talk with a competent advisor before proceeding or give me a call.

Mr. Voudrie is a Certified Financial Planner, a nationally syndicated columnist and the President of Legacy Planning Group, Inc., a Private Wealth Management firm in Johnson City, TN. He can be reached by calling 1-877-827-1463 toll-free, by email at jeff@guardingyourwealth.com or by going to www.guardingyourwealth.com.

Looking for an energetic expert who is passionate about financial and wealth management? Mr. Voudrie is an excellent speaker who will excite and inspire your audience. Mr. Voudrie is available for a limited number of speaking engagements, television appearances and radio talk shows. For booking information, contact Christine Lavender at (877) 827-1463 or email christine@guardingyourwealth.com.

Related Articles can be found at www.guardingyourwealth.com under the Guarding Your Wealth Article Archive:

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