The ‘stretch’ option for maximizing IRAs

By: Elliot Raphaelson

Because most employers have eliminated defined-benefit retirement plans, future retirees will depend more than ever on 401(k) plans, traditional IRAs and Roth IRAs.

To plan for a successful retirement, you must understand the fundamentals and nuances of these plans. The regulations are complex, and you cannot afford to make any mistakes. Not every financial planner is well-educated in this field. If you depend on a financial planner, make sure he/she has the required expertise. Don’t be afraid to ask a prospective planner to demonstrate it.

Before you do that, you need to educate yourself. I recommend Ed Slott’s “Retirement Decisions Guide” for 2018, available for $13 through IRAHELP.COM (or by calling 1-800-663-1340).

Regular readers of this column will recognize Slott’s name. He’s a leading expert on IRA planning, and I cite him frequently. Recently, I attended a two-day seminar for financial advisers sponsored by his company. One of the insights I came away with is the importance of designating the IRA’s beneficiaries.

One of the most important features of an IRA is the ability to extend its life as long as possible to take advantage of the associated tax advantages. Many choose to include children as beneficiaries as a way to create a “stretch” IRA.

A beneficiary who inherits and IRA will be required to make age-related withdrawals. The older an individual is, the greater the required mandatory withdrawal. Accordingly, children who are beneficiaries can stretch out the required withdrawals for a longer time frame than a spouse. If your children are in a lower tax bracket than your spouse, that would be another advantage.

A major reason why attempts to create a stretch IRA fail is that the individuals who set them up fail to name a living beneficiary. It’s that simple.

Too many people believe that IRA succession is taken care of or covered in the will or estate plan. It isn’t. Wills do not cover IRAs! The IRA passes outside the will by beneficiary designation. That designation is retained by the financial institution that maintains your IRA account.

If the financial institution you established your IRA with merged with another financial institution, your initial form establishing beneficiary designation may not have been retained by the new firm. It is your responsibility to ensure that the new financial institution has an up-to-date beneficiary designation form. If your financial institution does not have a written designation, then your estate will be the beneficiary, and your beneficiaries would lose the stretch option.

If a life event occurs that alters your choice of beneficiary, you must update your beneficiary designation forms. Changing your will is not sufficient! If you go through a divorce, and you don’t want your ex-spouse to be a beneficiary, you must update the designations. If one of your beneficiaries dies, it is likely you will want to update the designations. Again, these changes have to be made via the beneficiary form, not your will.

After you die, how can your beneficiaries maximize the use of the stretch option? Only spouse beneficiaries have the option of rolling over the inherited IRA into their own IRA. Your spouse also has the option of initially establishing an inherited IRA and subsequently rolling it over into his/her own IRA. This makes sense for beneficiaries who inherit before age 59 1/2.

Suppose a widow inherits her deceased husband’s IRA before age 59 1/2 and rolls it immediately into her own IRA. If she withdraws funds, she will be subject to a 10 percent penalty. However, if she maintains it as an inherited IRA and withdraws funds from it, the 10 percent penalty is avoided. At 59 1/2, she can roll the account over to her own IRA. Withdrawals from traditional IRAs will be subject to income taxes on both inherited IRAs and individually owned IRAs.

Inform your beneficiaries, preferably in writing, of the steps they should take to transfer the assets to their accounts, or specify a financial planner they should be communicating with. If your beneficiaries don’t transfer the accounts in a timely manner, thousands of dollars will be lost.


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A retired executive of Chase Manhattan bank, Elliot Raphaelson joined The Savings Game after decades of experience as an advisor, teacher and author in the field of personal finance. His writing has appeared in The New York Times, Town & Country, Vogue, Self, Savvy and Working Woman magazines. For ten years he has worked as a certified mediator and trainer in a Florida county court.

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Elliot Raphaelson

A retired executive of Chase Manhattan Bank, Elliot Raphaelson joined The Savings Game after decades of experience as an advisor, teacher and author in the field of personal finance. He has taught courses in personal financial planning at The New School for Social Research and at the Military Academy at West Point, as well conducting seminars for Chase, Dow Jones & Co. and other corporations.

Past publications include Planning Your Financial Future (Wiley, 1982), and his writing has appeared in The New York Times, Town & Country, Vogue, Self, Savvy and Working Woman magazines. For ten years he has worked as a certified mediator and trainer in a Florida county court, where he helps resolve personal financial problems of every description.

Your indispensable guide to Social Security

By: Elliot Raphaelson

There is no question that Social Security issues are important to the American public. It is not unusual for me to receive more than 100 responses from readers when I write a Social Security-related column.

Regular readers know that I frequently reference Andy Landis as a source. He has just updated his book, "Social Security: The Inside Story" (www.andylandis.biz), which I consider an indispensable resource on the topic. His book is up-to-date, comprehensive, well-organized and easy to understand. He provides numerous helpful examples. In each chapter, he includes Social Security references so readers can read the associated regulations that were discussed.

The book provides a useful overview of Social Security and chapters on retirement benefits, family benefits, survivor benefits, disability benefits and Medicare. There are references to available calculators for estimating your benefits, hints on effective filing, and a very important chapter on maximizing your benefits.

The chapter on maximizing Social Security benefits is particularly useful. Landis discusses the advantages of postponing filing for benefits up to age 70, which increases your benefits by 8 percent for every year you wait past full retirement age (FRA). Another advantage in doing so is that widow/widowers might be entitled to a larger benefit if you choose this option. Filing for widow/widower benefits only does not preclude filing for benefits based on your work record at a later time.

The chapter also discusses restricted application for "spousal only" payments. This option allows you to file for your spousal benefit after you reach your FRA, and then to file for your benefits based on your work record up to age 70. Unfortunately, many Social Security representatives do not understand this option. When I have written about this option, I have been amazed at the number of readers who write complaining about the ignorance of many Social Security Administration representatives.

Note that this option is available only to individuals who were born before January 2, 1954. And to qualify, your spouse would have to have already filed for his/her benefits. You must not have received a reduced retirement benefit or spousal payment before.

It would make sense to use this option only if your payment at age 70 is higher than your spousal payment at FRA. If you meet these qualifications, it can be a valuable tool.

Many of the options and tools discussed in this book will help you make the right decisions. You cannot depend on advice from SSA representatives. Many financial planners are far from experts in Social Security as well. I recommend that it is in your best interests to become an expert in Social Security before it is time to apply for benefits. Making the right decision can provide you with hundreds of thousands of additional benefits.

Many divorced individuals do not understand their Social Security options. If your previous marriage lasted at least 10 years, and you either have not remarried or remarried after age 60, you may have benefits you are not aware of. You can't depend on the SSA to inform you. For example, many individuals believe that because their ex-spouse remarried, it affects their benefits. This is false; it has no impact.

If your ex predeceases you, it is possible that you are entitled to larger benefits than you previously were receiving. For example, assume your ex worked until age 70 and was receiving $2,000 per month in Social Security benefits, and he/she died. If you are single, or remarried after age 60, you are entitled to whichever is greater, your ex-spouse's benefit or the benefit you are now receiving.

Landis' book covers this and other topics in great detail.

If you have any relatives approaching retirement age, one of the best gifts you can provide is a copy of this book. It can make their retirement much more prosperous. Making the right Social Security choices is critical. Making the wrong choices is expensive and difficult to undo.


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A retired executive of Chase Manhattan bank, Elliot Raphaelson joined The Savings Game after decades of experience as an advisor, teacher and author in the field of personal finance. His writing has appeared in The New York Times, Town & Country, Vogue, Self, Savvy and Working Woman magazines. For ten years he has worked as a certified mediator and trainer in a Florida county court.

Comment

Elliot Raphaelson

A retired executive of Chase Manhattan Bank, Elliot Raphaelson joined The Savings Game after decades of experience as an advisor, teacher and author in the field of personal finance. He has taught courses in personal financial planning at The New School for Social Research and at the Military Academy at West Point, as well conducting seminars for Chase, Dow Jones & Co. and other corporations.

Past publications include Planning Your Financial Future (Wiley, 1982), and his writing has appeared in The New York Times, Town & Country, Vogue, Self, Savvy and Working Woman magazines. For ten years he has worked as a certified mediator and trainer in a Florida county court, where he helps resolve personal financial problems of every description.