Why a “Stretch IRA” Simply Begs the Real Question (PART 2)
Let’s begin by stating the bottom-line issue when it comes to a “Stretch IRA”: to ensure the transfer of all or at least the lion’s share of qualified plan money that you’ll leave to your beloved heirs. In fact that’s the only reason. While I haven’t met anyone yet who’s even remotely thrilled about the idea of their heirs having to share their inheritance with the IRS, a “Stretch IRA” – get this – will not solve that issue. Actually, given the real-life facts on the ground, “Stretch IRAs” don’t even begin to scratch the surface of the income-tax dilemma for two simple reasons:
Issue #1: Mission Control, We Have a Tax-Rate Problem
The plain and simple fact is that “tax rate” is completely irrelevant here, in the sense that whatever the tax rate happens to be is exactly what it will be. Just because someone uses the “Stretch” option doesn’t mean that they’ll end up with more money than the person who did not use that option. That’s simple, basic Income Tax 101. Again, ‘Stretch IRA’s” don’t have any special lower tax rates, period!
All of which means the much more likely scenario is that tax rates will increase. If you’re honest, you know this is true, don’t you? If that were to happen, where does that leave “Stretch IRAs” as a solution? Think about it in the light of this little hint: we presently have a temporary extension of our historically low tax rates. What do you really suspect will happen next? You need to understand that all “Stretch IRAs” do is permit beneficiaries to withdraw small amounts – BUT they must pay income-tax at the “prevailing rate” at that time of each withdrawal. Are you beginning to see how stepping back from all the hype and actually breaking things down brings clarity?
Issue #2: Sorry, But the Choice Is NOT Yours.
This is extremely important to understand. The decision of whether to “Stretch” or not ultimately rests with your beneficiaries. Think about it – the owner must be deceased for the decision even to apply. Remember our example in Part 1 of this series? It was George Junior (not George Senior) who called that shot? Again, that’s another fact of life.
From what I’ve seen as a practicing financial professional, whenever beneficiaries are faced with the choice of how to withdraw their inherited IRA money, for some strange reason they always opt to take all of it out ASAP!! While there may be several reasons for this phenomenon, I’m quite sure it’s also because they realize at that point that a “Stretch IRA” is not really a solution. In fact, if you were George Junior from Part 1, would you have opted for the “Stretch IRA” (Option 3)?
This reminds me of a fascinating story my late grandfather told me when I was a young boy. You’ll love it!
Let’s begin by stating the bottom-line issue when it comes to a “Stretch IRA”: to ensure the transfer of all or at least the lion’s share of qualified plan money that you’ll leave to your beloved heirs. In fact that’s the only reason. While I haven’t met anyone yet who’s even remotely thrilled about the idea of their heirs having to share their inheritance with the IRS, a “Stretch IRA” – get this – will not solve that issue. Actually, given the real-life facts on the ground, “Stretch IRAs” don’t even begin to scratch the surface of the income-tax dilemma for two simple reasons:
Issue #1: Mission Control, We Have a Tax-Rate Problem
The plain and simple fact is that “tax rate” is completely irrelevant here, in the sense that whatever the tax rate happens to be is exactly what it will be. Just because someone uses the “Stretch” option doesn’t mean that they’ll end up with more money than the person who did not use that option. That’s simple, basic Income Tax 101. Again, ‘Stretch IRA’s” don’t have any special lower tax rates, period!
The only scenario under which I could see a benefit of some sort is in the highly unlikely situation of tax rates actually decreasing down the road – after the “Stretch” period begins. However, given where we are fiscally as a nation, it would be foolish, quite frankly, for anyone to think that income-tax rates are going to be trending downward.
All of which means the much more likely scenario is that tax rates will increase. If you’re honest, you know this is true, don’t you? If that were to happen, where does that leave “Stretch IRAs” as a solution? Think about it in the light of this little hint: we presently have a temporary extension of our historically low tax rates. What do you really suspect will happen next? You need to understand that all “Stretch IRAs” do is permit beneficiaries to withdraw small amounts – BUT they must pay income-tax at the “prevailing rate” at that time of each withdrawal. Are you beginning to see how stepping back from all the hype and actually breaking things down brings clarity?
Issue #2: Sorry, But the Choice Is NOT Yours.
This is extremely important to understand. The decision of whether to “Stretch” or not ultimately rests with your beneficiaries. Think about it – the owner must be deceased for the decision even to apply. Remember our example in Part 1 of this series? It was George Junior (not George Senior) who called that shot? Again, that’s another fact of life.
From what I’ve seen as a practicing financial professional, whenever beneficiaries are faced with the choice of how to withdraw their inherited IRA money, for some strange reason they always opt to take all of it out ASAP!! While there may be several reasons for this phenomenon, I’m quite sure it’s also because they realize at that point that a “Stretch IRA” is not really a solution. In fact, if you were George Junior from Part 1, would you have opted for the “Stretch IRA” (Option 3)?
This reminds me of a fascinating story my late grandfather told me when I was a young boy. You’ll love it!
Due to extreme famine in their land, Ananse convinced Ted and Mike, who happened to be twin brothers, to go hunt for food with him. After all, they all needed to survive. They scouted the land for several hours, when Ted and Mike each found an orange. Ananse, on the other hand, came up with nothing – because all he did was take a nice long nap under the shade of a large oak tree the entire time. Mind you, Ted and Mike were unaware of Ananse’s napping.
The moral of my story? “Stretch IRAs” beg the real question – they always have and always will. Here’s the thing: Did you know there are simple, straightforward changes you could make TODAY that wouldn’t cost you anything more than you’re already spending, irrespective of your age, health, or wealth and that can help ensure that your heirs will receive their inheritance completely income-tax free? Yes, there are!Ananse woke and, finding that Ted and Mike had secured some food, suggested that the brothers give up one whole orange for him while they split the other in half between them; Ted would get half and Mike the other half. Of course, the brothers rejected that offer outright. But Ananse came up with a fresh suggestion that would allow each of the brothers to keep their respective oranges. However, since all of them had gone hunting together, Ananse told them it was fitting and proper for each brother to share with him by giving him half of their respective oranges. To that they complied. You see, the thing about Anase is that he always got what he wanted, one way or the other – and made his victims felt good about it until after the fact.
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Contact a financial professional at Laser Financial Group TODAY to schedule your no-strings, complimentary session to discuss which sort of plan will work best for YOUR needs. We're guessing it's NOT a ""Stretch IRA." LaserFG.com or 301.949.4449.
Contact a financial professional at Laser Financial Group TODAY to schedule your no-strings, complimentary session to discuss which sort of plan will work best for YOUR needs. We're guessing it's NOT a ""Stretch IRA." LaserFG.com or 301.949.4449.
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