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Leveraging Your IRA

Todd Wooten

If you’re like most Americans approaching retirement, for the last 40+ years, you’ve been busy contributing to your IRA or qualified plan. You’ve successfully pushed your income taxes into the future, but the tax collector is knocking on your door and you can’t ignore him any longer. At age 70 ½, required minimum distributions (RMDs) must begin, and Uncle Sam finally gets his share. Once the process of withdrawing from your IRA begins, one of three things will happen: You will live on it, leverage it, or lose it.

Some retirees must live on their IRAs because savings and Social Security are not enough to meet their monthly income needs. These IRAs will be completely tapped out and nothing will be left over. They will not be able to leverage their IRA because every bit of it will be used to keep them afloat for the next 30 years or more.

The remaining group of seniors doesn’t need to live on their IRAs. In fact, research indicates that 65% of traditional IRA-owning households who are currently not taking withdrawals from their IRAs do not intend to make withdrawals until they reach the mandatory age of 70 ½ (Holden and Schrass, 2012). What these seniors know is that IRAs are infected with taxes. If they weren’t required to make withdrawals, many would opt to pass the asset on to their loved ones and charitable causes.

Multi-generational wealth transfer of a traditional IRA can only be accomplished through the implementation of a strategic plan. The unfortunate truth is that the majority of IRA owners in America have no plan in place that will allow them to optimize their retirement savings and help them mitigate taxes. They will take out their RMD each year and upon their death, without proper planning, they will LOSE their IRAs to taxes, spendthrift heirs, and lost opportunity.

Lack of planning for the disposition of an IRA not only hurts the owner, but it creates a host of problems for the inheritor. Most IRAs are cashed in at the death of the second spouse. The value is added to the heir’s taxable income and has the potential to bump them up to the next higher tax bracket. For example, if an heir is in a 10 or 15% tax bracket, the new inflow of inherited IRA money causes their net income to increase, which can then push them into the 25% tax bracket. Realize that the new tax rate is applied not only to the IRA money, but also to all of their earned income for that tax year. Add to that state income taxes, and you have a tax nightmare. As you can see, becoming the perfect taxpayer is not difficult; it takes no time or money, and the results are guaranteed.

According to a recent national study (Zagorsky, 2012), the next unfortunate truth is that after taxes take their toll, most heirs will spend at least half of their inheritance. It doesn’t take long to lose a lot of money, and the typical inheritance is spent anywhere from 93 days to 17 months.  A lifetime of accumulation and earnings can be gone in a flash. However, losing the IRA to taxes and spending can be avoided through proper planning and leverage.

The rate of savings in the United States is alarmingly low, while the cost of living is rising each year. These factors, coupled with increased longevity, have created a new challenge that recent retiring generations have not experienced. Today’s workforce needs to do everything they can to put money away for their futures. Unfortunately, research has shown that many are not fully prepared to provide for their own retirement (Payne, Yorgason and Dew, 2013). The forecast looks bleak, but there is a way that parents can help their children and grandchildren to prepare for retirement.

Family is the most precious commodity and concern for the welfare of children and grandchildren is at the front of most parents’ minds. This generation and future generations are in a tough situation. The turbulent financial horizon promises increased taxes, market volatility, low interest rates, skyrocketing health care costs, and greater longevity. Each of these puts tremendous pressure on pensions, Social Security, and Medicare. What will retirement look like for your children and grandchildren? If you could be the solution to their troubled financial future, wouldn’t you want to know how?

Your IRA, 401(k) and other qualified retirement plans are valuable assets that can be used to not only meet your financial needs but the future retirement needs of your children and grandchildren. With leverage, you can make one dollar do the work of many. Instead of making Uncle Sam the largest recipient of your qualified savings plans, why not create a legacy that will impact your family for generations to come? Whose IRA is it anyway: Yours or the government’s?

Let’s take a closer look. The fact remains that there is no getting around the RMD. You must take it out and pay the tax, based on your current tax bracket. But all is not lost. With proper positioning, your after-tax RMD can become a valuable financial tool. By using this unneeded income, there is a way to create a substantial family legacy that provides a tax-free inheritance for your loved ones.

Another form of leverage for maximizing your IRA is to extend the payout over multiple generations. Upon the death of the second spouse (if the IRA owner is married), proper structuring creates an asset that keeps giving and giving. Imagine what it would be like for your children and grandchildren to receive a check from you on their birthday every year for the rest of their lives.

Unless you take the time to create a plan for your IRA, you are in the process of transferring your wealth to the government who has created this bleak financial situation, controls the outcome, and will profit the most from it. They’ve created a generational problem that our children and grandchildren will have to pay for. That’s why there’s no better time than now to create a well-defined plan for your IRA that will:

  • Protect the principal
  • Leverage the asset
  • Accelerate the growth
  • Neutralize taxes™

An old proverb reminds us that, “A vision without a plan is just a dream. A plan without a vision is just drudgery. But a vision with a plan can change the world.” You can change your family’s world. It’s time to discuss a generational solution. Your family’s economic situation is a matter of choice, not a matter of chance.

  • Holden, S. and Schrass, D. (2012). The Role of IRAs in U.S. Households’ Saving for Retirement, 2012. ICI Research Perspective, 18, no 8.
  • Zagorsky, J. (2013). Do people spend or save their inheritances? Understanding what happens to inherited wealth. Journal of Family and Economic Issues, 34:74. doi: 10.1007/s10834-012-9299-y.
  • Payne, S. H., Yorgason, J. B., Dew, J. P. (2014). Spending today or saving for tomorrow: the influence of family financial socialization on financial preparation for retirement. Journal of Family and Economic Issues, 35:106. doi: 10.1007/s10834-013-9363-2.

About the Author:

Todd Wooten is the founder and president of Blue Sky Financial Partners, one of Northwest Indiana’s premier insurance and financial advisory firms, specializing in assisting retirees, pre-retirees, and business owners in creating and growing their wealth, protecting and preserving their life savings, and planning for the distribution of those life savings in the most tax-efficient manner. Todd is a featured contributor for Fox Business, is a nationally sought-after speaker, and frequent lecturer for educational institutions.

To schedule a free consultation, call Blue Sky Financial Partners at (219) 548-9370 or visit


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