Individual Retirement Account (IRA) plans provide an opportunity to accumulate funds for retirement.
But some taxpayers have enough other assets that the amounts in these plans can be a supplement for retirement funding. In effect, these funds become sources of discretionary spending.
If you are in this situation, you can provide a significant benefit to your heirs without risking your own retirement lifestyle.
One advantage of an IRA plan is that it is not subject to income tax until the participant withdraws the funds. While the funds remain in the IRA trust, they are exempt from income taxes. This allows the trustee to invest the funds without income tax concerns.
Imagine investing money in the stock market during the last five years and not having to pay income tax on the gains. If you plan correctly, you can allow your heirs to continue this benefit for many years.
When the participant dies, the trustee must pay the balance in an IRA plan to the participant’s heirs. Normally, the pay-out period cannot be longer than the participant’s life expectancy. Therefore, if the life expectancy of the participant immediately before death is 10 years, the trustee must distribute the retirement account balance within 10 years.
Proper planning can extend the distribution period by 30 or 40 years. The ability to accumulate funds in the pension trust can result in the heirs receiving millions of dollars vs. thousands of dollars, because the trust earns and reinvests the funds without paying income taxes.
Here’s an example of how the process works:
Tom has an IRA account with a balance of $550,000 when he begins taking distributions at age 72. He has selected his 8-year-old granddaughter as the designated beneficiary of the IRA with average earnings of 9 percent annually. At age 82, Tom dies, having taken the minimum distributions required from his IRA.
How much money will his granddaughter receive if she takes the minimum distribution required from Tom’s IRA? More than $41 million!
If you have the correct set of circumstances, your heirs can have similar benefits. The key is careful planning.
John C. Finnucan, CPA, MSA, JD, MT, is managing partner of Bruner-Cox LLP, (www.brunercox.com), a full-service accounting and business consulting firm with offices in Akron and Canton.
