No one questions that individual retirement accounts (IRAs) are an excellent way for your clients to build wealth for their retirement years. They dedicate money in small increments, and over the years their investment will grow. Certainly, it is important to mention that no rate-of-return on any investment is guaranteed, but historically the stock market has grown, which means IRAs have grown as a result.
The Problems With the IRA Strategy
While the IRA market has grown, many individuals approach their strategy incorrectly and make the following mistakes:
» Most investors do not begin withdrawing money until after they turn 70 years old. This is the age when the IRS says they must take an annual required minimum distribution (RMD). Since the holder has let their investment grow and it is based on the life expectancy table, this RMD is usually a rather large amount. Often, the IRA holder isn’t able to enjoy the money they so wisely invested due to health reasons, and they pass away before the fund is exhausted.
» Many investors view their IRA as an inheritance. They hold on to it so they can pass it along to their children, but this is not the intention of IRAs. IRAs were designed to generate income for the holder during their retirement years.
What Really Happens
Your clients hold on to their IRAs, taking only the RMD. When your client dies, the fund is passed to a non-spousal beneficiary (typically your client’s children), but all too often the IRA gets liquidated within the first year. This equates to a large percentage of the fund being taxed by the IRS – never to be used by the family as your client intended.
To avoid the cash-out scenario, many parents sit down with their children and a financial professional to set up a stretch-IRA, which ensures that each of the beneficiaries gets a smaller amount over their lifetime. This gives the parent peace of mind that their hard-earned money will benefit the children for decades to come.
However, upon a holder’s death, the stretch-IRA often is not being upheld. The beneficiaries instead choose to take a lump-sum distribution anyway, despite the tax ramifications, to pay off a home or take the vacation of a lifetime.
An Alternative IRA Strategy
I saw it as senseless that folks were hanging on to their IRAs until they are required to take RMDs. Over and over again, I saw them not fully enjoying their money before they passed away and I watched their kids liquidate their investments.
I knew I needed to find a solution to this recurring scenario, one that would make people feel comfortable to spend their hard-earned and wisely invested monies earlier in their golden years. This way they could use it for vacations, or to buy a second home and enjoy their investment.
This is when I thought, “What if you could treat your IRA like a pension?”
When they existed, pensions provided guaranteed income during a person’s golden years. An employee worked diligently for a company for many years, and upon retirement, they received their pension – a fixed amount of money every month for the rest of their lives. A pension allowed people to enjoy their retirement years – and they’d earned it.
Remember, IRAs were not meant to pass on wealth. IRAs were designed to generate income so your clients can enjoy their retirement.