Avoiding Common IRA Mistakes
IRA Account owners often feel in over their heads. It often seems that the rules as to how much can be saved each year, when and how distributions are made, and who can be a beneficiary are complex and intimidating. This article will help you identify and avoid common mistakes.
- Stretching the Wrong Way
Let's say that you have been contributing to your IRA for years now. And let's assume it's been consistently earning an average of somewhere between 6% to 8% a year in mutual funds. Upon reaching retirement, you decide at age 70 to begin taking the IRS-required Minimum Required Distributions ('MRDs') at roughly 4% a year (in order to make the money last longer). And in the meantime, that portion of the IRA account still invested continues to grow even though you're drawing down a minimum amount.
Let's say that at your death you leave the remaining amount of $250,000 to your child who's age 42 at that time. Now with your account earning at least 6% a year that will generate about $1,250,000 during your child's remaining life expectancy. Leaving a $500,000 IRA would generate even more - $2,500,000. Sounds good so far, right?
Sadly, in the majority of cases heirs that inherit an IRA account this way get greedy and short-sighted. They close out the IRA account, taking the money and paying taxes they could have avoided. Instead of letting the money work for them over their remaining lifetime, they head to the new car dealership with a shiny new car on their mind. So now the money is gone.
But there's a better way - a much better way. Using IRA Inheritance Trust , you'll be able to control and specify how and when your heirs get paid. And on top of that, you'll be able to protect the money from the risk of your child or nephew or niece making the wrong choice of a possible future ex-spouse or from their poor spending habits.
- Yes, But I Love My Spouse
Many IRA Accounts are left to the surviving spouse - and you can understand why. The spouse has put up with you through thick and thin and after you're gone certainly deserves the extra financial security. That's all well and good. However, when leaving an IRA Account to the spouse, be aware of the tax consequences.
Yes, there is an 'unlimited marital deduction' for saving estate taxes now, but remember that when your spouse dies later if the amount of your spouse's total combined IRS Taxable Estate is over $1 million after 2011, a sizable tax liability might be staring your heirs in the face.
Moreover, if your surviving spouse leaves the remaining amount of the IRA to your children (or nephews and nieces) and they choose to withdraw it, pay the taxes and then it goes into a joint account with their own spouse, the inheritance may go away in their future divorce or taken away as the result of a lawsuit. The IRA Inheritance Trust could avoid these problems.
Source: http://ezinearticles.com/
Added: April 23, 2008
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