Insider Secrets to Maxing Your IRA

Little Used Powerful Tool. This is about a little known planning tool, the Retirement Benefits Trust, which can provide dramatic benefits for generations of your family.

Great Wealth Accumulation. There is a way to create great wealth using IRA (Individual Retirement Account) and other retirement benefit planning. This is basically done by using the tax deferral available from IRAs for multiple generations. It will become much more important because taxes on your earnings and the earnings of your children and grandchildren are going up dramatically in the coming decades. For many, income taxes will take away 50% of your income. Because you can roll over your company retirement plan to an IRA when you retire, your IRA can have millions of dollars. Without proper planning, most of your retirement savings could go to taxes.

Tax Deferral. People use IRAs for postponing paying taxes during their lifetime. What is not well understood is how your IRA can continue to save on taxes even after you’re gone from this Earth (I am not talking about space travel).

Traditional IRA. There are two types of IRAs: Traditional and Roth IRAs. Under the traditional IRA, you are able to deduct the contributions you make to the IRA, there is no tax on gains inside the IRA for qualified contributions and when someone takes the money out of the IRA, the tax must be paid on all distributions at the then current ordinary income tax rate. The owner of the traditional IRA must start taking required minimum distributions from the owner’s IRA April 1 of the year after the owner turns 70 1/2. You must take out each year the required minimum distributions based upon the applicable IRS tables that project how long you will live. If you live as long as the IRS thinks you will live or longer, you may have taken everything out of the IRA.

Roth IRA. For the Roth IRA, you do not get a tax deduction when you make the contribution, you do not pay taxes on the earnings inside the Roth IRA and when someone takes funds out there is no tax on the money put in or on the earnings. The owner does not have to take out minimum distributions during the owner’s lifetime. But after the owner dies, the person inheriting the Roth IRA must take out distributions over their life expectancy under the IRS tables.

Tax Free Growth Does It. The trick is to legally postpone taking distributions as long as possible. That is because you get wealthy by consistently making money over time, reinvesting the earnings, getting a healthy rate of return and not paying taxes on the earnings.

Stretch it Out. The goal, then, is to have the IRA go to the youngest person possible after the owner dies. This does not happen in most cases because people leave the money to their surviving spouse who is usually about the same age (Anna Nicole Smith being the exception) or to children, nieces or nephews who take out the money and spend it. Only a few advisors understand Retirement Benefit Trusts (RBT).

Willy Wise and his Retirement Benefits Trust. Willy Wise wants to provide a legacy for his children, grandchildren and a favorite niece. He can see for that for the next 50 years or so, federal and state governments will be imposing higher and higher tax rates on income. He sets aside a life insurance trust and other assets that provide for all the needs for his wife. He has eight children and grandchildren and his niece. He sets up a “Retirement Benefits Trust” for his eight children, grandchildren and niece during his lifetime. Willy can amend this Retirement Benefits Trust during his lifetime so if Willy Wise III turns into a bum, Willy can cut Willy Wise III out of his RBT. Willy leaves the largest percentages in his RBT to his grandchildren, thereby maximizing the tax deferral and the growth of the assets. Willy does this for both his traditional and Roth IRAs. Willy’s advisors prepare beneficiary designation forms for Willy using the same percentages for his IRAs as is set forth in his RBT. Willy’s IRAs provide for the future education, capital for investments and a sound retirement for his eight descendants and his niece. When Willy dies, his spouse, children and advisors take all the necessary steps for each of the nine subtrusts of the Willy RBT to qualify to be an IRA beneficiary.

Multiple Benefits:

1. Maximum Tax Savings. Each child, grandchild and niece can use their life expectancy to determine minimum distributions. So for ten year old Wonda, with a 100 year life expectancy, Wonda’s trustee would only have to take out 1/100 each year and the remaining amount accumulates tax free.
2. Asset Protection. The assets inside the IRA are protected from the creditors, predators, spouses and relatives of the child, grandchild or niece.
3. Heirs Can’t Blow the Money. The heirs do not have to have the power to take out all of the money and blow it.
4. The Other Guy’s Kids Don’t Get Willy’s Money. Willy’s heirs get the money rather than a second spouse of the surviving spouse or someone else’s children.

Watch for Announcements. There are downsides, details and technicalities that need to be discussed with your advisor. Look for announcements on valuable workshops we will be having on this topic.

The Big IRA Book. This discussion is based upon the Big IRA Book from experts Robert S. Keebler, Cecil D. Smith and Carol H. Gonnella, but none of these individuals are responsible for any of the content of this article.

Circular 230 Disclosure Notice
Pursuant to recently enacted U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly Indicated, any federal tax advice contained in this document, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed in this document.