RETIREMENT STRATEGIES. Stretch Your IRA Distributions

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1 RETIREMENT STRATEGIES Stretch Your IRA Distributions

2 Reach out to your future and your heirs Perhaps you no longer ask, Will I have enough money to retire? but rather, What if I don t spend all my assets in retirement? Can I create a legacy for my children and grandchildren? Even if you don t consider yourself affluent today, you probably want your retirement savings to continue growing as long as possible to have enough income in retirement and for future generations to enjoy whatever you leave behind. DO MORE FOR YOUR HEIRS STRETCH YOUR IRA The longer your money stays invested in an individual retirement account (IRA), the more growth potential it has. If you decide to stretch your IRA, the objective is to keep your account growing throughout your lifetime and over the lifetime of your spouse and perhaps a child or grandchild. Through a combination of long-term investing, tax deferral, and minimal withdrawals, your IRA can develop into a substantial legacy for your heirs to enjoy. Stretching your IRA across multiple generations may help fulfill your retirement needs and reach out to your heirs in a very tangible way. Your legacy may forever change their lives. In the next 50 years, families will give their heirs an astounding $25 trillion the largest transfer of wealth in history. Worth, March 2003 Investment Products: ARE NOT INSURED BY THE FDIC OR ANY FEDERAL GOVERNMENT AGENCY MAY LOSE VALUE ARE NOT A DEPOSIT OF OR GUARANTEED BY ANY BANK OR ANY BANK AFFILIATE

3 1 HOW DO YOU STRETCH YOUR IRA? First, consider consolidating multiple retirement plan assets into one IRA. Then withdraw only the required amounts (know as Required Minimum Distributions or RMDs) over your lifetime and name either your spouse or a younger person (such as your child or grandchild) as the beneficiary of your IRA. Upon your death, the proceeds ( distributions ) can be paid out over your beneficiary s lifetime (and perhaps to a subsequent beneficiary). This not only enables your IRA to continue growing over multiple generations, but it may also result in a smaller tax liability for each beneficiary than a lump-sum payment would. 1 Only an IRA has the potential to stretch in this way. Keep this in mind when considering the rollover options you may have from an employer s retirement plan. THE IMPACT OF RMDs The rules for RMDs determine the amounts and timing of mandatory withdrawals from an IRA. For instance, you must begin taking distributions from a traditional IRA no later than April 1 of the year following the year in which you become age The amount you must withdraw annually is determined by using the account balance as of last December 31 and a factor found in an Internal Revenue Service table based on your age. While you cannot take less than the RMD, you can always withdraw more for unexpected expenses. 1 Not all financial professionals are tax or legal advisers. You should consult a tax or legal adviser regarding your particular situation. 2 There are no RMDs from a Roth IRA during the owner s lifetime or if a spouse inherits the IRA. However, non-spouses who inherit a Roth IRA are subject to the RMD rules.

4 2 Stretch your IRA over three generations Mark retires at age 63 and rolls his $100, (k) plan balance into an IRA. He names his wife Marilyn, age 55, as his beneficiary. This example not only illustrates compounded returns, but also the power of stretching those returns for as long as the tax law allows. Original balance: $100,000 Total life of IRA: 55 years Years in distribution phase: 39 years Total amount distributed: $2,290,871 Total federal income taxes: $710,166 Marilyn dies at ag Jessie, age 55, rec her own life expec son John as her be 12/31 Balance after Distribution Distribution Tax Amount Marilyn defers distributions until age and takes RMDs. As you can see, Mark s $100,000 rollover has already grown to over $350,000. Mark dies at 68 without having taken any distributions. Marilyn rolls the IRA over into her own IRA and names her daughter Jessie, age 34, as her beneficiary. This chart is hypothetical and is not intended to represent the performance of any particular product. It assumes an annual rate of return of 8 changes, inflation, or other risks. * Current RMD rules prevent John from taking distributions beyond Jessie s life expectancy.

5 3 When Jessie dies at age 76, John begins to receive the remaining seven years of payments, based on Jessie s life expectancy of 83 years.* e 80. The following year, eives RMDs based on ancy. Jessie names her neficiary. % and that investors are not relying on the money in the account to fund their own retirement. It does not take into account possible tax law

6 4 SPOUSES HAVE AN ADVANTAGE A spouse-beneficiary who inherits an IRA has two additional options: He or she can defer RMDs until the year in which the owner would have attained age This works well if the surviving spouse is the older of the two. The spouse may also name another beneficiary to receive distributions upon his or her death. Alternatively, the spouse-beneficiary could roll over the IRA into his or her own name, which resets the clock, that is, RMDs will be recalculated for the spouse-beneficiary s age. The new owner can name a son or daughter as beneficiary, and upon the owner s death this beneficiary can take distributions and name a child as beneficiary. This stretches the IRA across three generations. (Refer to the chart on page 2.) MULTIPLE BENEFICIARIES If you intend to name several beneficiaries, consider creating separate IRAs for each designated beneficiary or group of beneficiaries. This can be done during your lifetime or until December 31 of the year following your death. By doing so, the life expectancy of each beneficiary can be used in his or her account. Otherwise, the life expectancy of the eldest beneficiary would be used, which would result in higher distributions. CHANGING BENEFICIARIES You may select and change beneficiaries during your lifetime even after you begin taking RMDs at age It s also important to name contingent beneficiaries because after your death, your beneficiary can choose to let the IRA pass on to the contingent beneficiary by disclaiming his or her right to the IRA. GET THE GUIDANCE YOU NEED A stretch IRA is easy to establish and can be a very powerful estate-planning tool, but it may not address all your concerns. For example, you may wish to have estate and income taxes paid, limit a beneficiary s control of the IRA assets, provide professional oversight of the IRA, or provide an income stream for a dependent. Your licensed financial professional has the experience and tools to help you. Reach out to your future today. Call your financial professional.

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8 C4 Not all financial professionals are tax or legal advisers. Please consult your tax or legal adviser regarding your particular situation. Securities products and services are distributed by Prudential Investment Management Services LLC, a Prudential Financial company. Strategic Partners is a service mark of The Prudential Insurance Company of America. IFS-A P2418 Ed. 10/01/2005 STRATEGIC PARTNERS SM