| Income taxes are a great inhibitor to building wealth. I've | | | | in income and still been worth over $4 million! |
| talked about the power of stretching an IRA across | | | | In this example, we used a Traditional IRA. A |
| multiple generations and how it can build tremendous | | | | Traditional IRA provides a tax deduction when you put |
| wealth. Now, I'll show you how it can be done income | | | | money into it, but then you have to pay taxes on |
| tax-free. | | | | every dollar when you take it out. In our example, |
| Last week I shared a little-known secret of how to | | | | assuming a 30% income tax rate, approximately |
| legally turn an investment of $3500 per year into | | | | $3,600,000 would have been lost to income taxes! If |
| MILLIONS AND MILLIONS OF DOLLARS. No, it wasn't | | | | the remaining money in the account was withdrawn it |
| by winning the lottery! It was through the power of | | | | could result in over $1.2 million in additional taxes. So |
| 'stretching' an IRA. | | | | almost $5 million is lost to income taxes! |
| Most people think that when they inherit an IRA that | | | | If Sam had used a Roth IRA instead he would not |
| they have to take all the money out and pay taxes on | | | | have received a tax write-off each year he invested |
| it right away. But the IRS allows someone who has | | | | the $3500. On the other hand, there would NOT be |
| inherited an IRA to 'stretch' it over their life expectancy. | | | | ANY income tax on the distributions. In other words, |
| They are only required to take out a small portion | | | | the $12 million in distributions plus the $4 million left in the |
| each year, allowing the rest to continue growing within | | | | account could have all been used FREE from income |
| the account. | | | | tax! That's the power of the Roth IRA. |
| In the last article a greatly oversimplified example was | | | | The power to compound your money tax-free is a |
| used because of space constraints. I used the | | | | great way to accumulate wealth. If your money is in a |
| example of Sam making a $3500 per year contribution | | | | Traditional IRA you may still be able to take advantage |
| to his IRA for 30 years until he retired. After retirement, | | | | of this power by converting it to a Roth IRA. When |
| he started to withdraw 5% per year until he passed | | | | you do, you'll have to pay taxes on the amount taken |
| away at age 80. His 50 year-old daughter inherited it, | | | | out of the Traditional IRA. If you are under 59 ½ |
| continued to withdraw 5% per year and let the rest | | | | years old, the IRS waives the normal 10% early |
| grow for 30 years. Assuming the account earned 10%, | | | | withdrawal penalty on the amounts converted. |
| it could have grown to over $9,000,000 by the time | | | | If you are retired and plan on using the money in your |
| she passed away. | | | | Traditional IRA then it probably doesn't make sense to |
| Technically, the IRS would require Sam's daughter to | | | | convert it. If you don't anticipate using it and your |
| withdraw money more quickly from Sam's IRA. Based | | | | children understand the power of stretching your IRA, |
| on her life expectancy, it would be designed to take | | | | then converting to a Roth IRA might be beneficial. |
| the account down to $0 over her lifetime. This | | | | You have the flexibility to spread the conversion over |
| changes the amounts. Based on current IRS tables, | | | | several years, allowing you to time the conversion to |
| there would be over $4 million left at her death instead | | | | take advantage of drops in market value or years in |
| of the $9 million. | | | | which you are in a lower income tax bracket. |
| The income generated by stretching the IRA is | | | | The rules surrounding IRAs are complex. For instance, |
| enormous. In the example, the IRA would have | | | | you can't convert a Traditional IRA to a Roth IRA if |
| provided over $1 million in income to Sam and an | | | | your Adjusted Gross Income is $100,000 or more. So |
| additional $11 million in income to his daughter. In other | | | | make sure to talk with a competent advisor before |
| words, the IRA would have generated over $12 million | | | | proceeding or give me a call. |