IRA Distribution Mistakes And How to Avoid them
(And Cut Your Taxes on IRA withdrawals)

You should never take more than you absolutely have to:

Let’s assume you own two pots of money. Each containing $100,000. The money contained in first pot we call it the regular or after tax money which you earned and saved and has been paid taxes on. The second pot is the IRA money, which you saved from your earned income before paying taxes and it is the IRA or the pension or the retirement money. Now every time you spend your regular money, it cost you the face value of the money, i.e. $1. is $1 but when you spend the IRA money, the cost could be as much as $1.38 because you need to pay income tax on the money you withdraw. So therefore if you want to reduce your tax bill, always consider spending your non IRA money first.

You will be much better off financially from an income tax stand point. You will be able to reduce your tax bill over your lifetime or at least you will delay paying taxes until later time and earn an income on the taxes you would have paid.

As you remember seeing in the presentation the regular money the $100,000 at the end of 20 years is worth$211,247 where as the IRA money if left alone could grow to be $360,000.

As we saw in the previous example that if the IRA money left alone could grow to be $360,000 and your child(ren) may get that money and you would think that (s)he will keep as it is and will continue to take minimum distribution till their age 70 ½.

Once you are dead that may not happen. They can go out and take it all out and spend it all on life’s foolish material luxuries. One sure way to avoid this is to leave your IRA in a trust for them. When the money is in trust you can still control even after you are gone as to how the money gets paid to your heirs.

One another possibilities exist that your custodian may mess it up by not acting upon your request and wishes. Like in 401k plan, they may have a force distribution in five to 10 years.

For a list of questions to ask your custodian, please ask us to provide you with one

How your Custodian may cause Problems:

And why you should have a “Retirement Asset Will”

From our presentation, let’s assume you have two sons. Jack and Tom. You named them as your beneficiaries for your IRA account when you went to open your IRA account in your Bank or Brokerage firms’ Beneficiary designation form.

Jack and Tom has two sons named Bob and Dan.

Let’s say, if Jack dies before you do. What happens. What happens to Jack’s half that you intended to leave him? Will Bob get that? That’s what we would like to think but it could go to Tom instead. Because when you filled out the beneficiary designation form at your present custodian’s

Place; there probably was not a place to put your grandchildren as beneficiary. So by not fully explaining your desires to appoint your grand children as beneficiary on your custodian’s form, it messed up the final dream.

How could you have avoided it? By giving them your set of instruction on your own form. This is known as “Retirement Asset Will”. These forms contain a detailed instruction on what how and when the money should be distributed and to whom. Call us for the name of attorney in our area.

By the way, if your custodian is not able to fulfill your requirement, you have the total ability to take your funds to the one who can. Call for a list in our area.

Mistakes we make in selecting Beneficiaries:

It is most customary that most people when they select beneficiary is to put their spouse or children as beneficiary. Sounds simple enough isn’t is? Let’s see what happens here.

When you leave IRA money to your spouse you have inflated her estate. When the spouse dies, if his/her estate

Is already worth $1.5 million (this is the estate tax exemption in 2004-5) than every dollar over that limit is subject to the estate tax. Just by leaving your IRA to them, you have created a larger taxable estate.

If instead of leaving it to your spouse, you left it to your son. He may go out and withdraw the money and decide to buy a big home or a big yacht. This property will naturally be owned jointly by him and his wife. Let’s assume the next week his wife decides to divorce him. A good attorney makes a settlement and she gets the home as a settlement. This is your IRA you worked and saved all your life for.

In order to avoid these two scenarios, you remember going to Mike’s seminar and remember he told you to get the Retirement Asset Will” trust document. Remember the foremost CPA’s and Tax attorneys of the nation advise that never leave your IRA money to your estate. Estates do not have a life time and that it dies with you. So your heirs can not Stretch them over their lifetime or avoid estate tax on it.

So what you should really do is the same thing a rich person does. They leave their IRA in a Trust and appoint some one with enough common sense and tax knowledge like your accountant or Banker etc…

Within the limitations set by you and the IRS required minimum distributions, the trustee has power to decide who among your beneficiaries will get the IRA and how much they will get. You can leave a detailed instruction on how and why and when the money over and above the minimum distribution can be paid out to your beneficiaries.

So if you would rather leave the money to your heirs in a trust and need help in selecting trustee or us to provide you with names of such institutions please call us.

If you really fill philanthropist and have charitable desires..

If you want to leave any amount of your estate to charity, do it from your IRA money. You can even specify more than one charity to receive a portion of your IRA money.

Why do we do this? If your children get the IRA money, they have to pay taxes on it when they take it out. For example for every $1.00 they take out, they can pay out as much as 33 cents in taxes. Also if your estate is over $1.5 million, they will pay an estate tax on it and may end up with only 35 cents in a dollar after it is all said and done. However if you leave them a dollar that is not in your IRA, they get to spend all of it without tax implications.

Now when you leave your money to charity, there is no estate tax or no income tax as the most charity does not pay taxes.(subject to 501 ©3) qualifications.

Therefore by selecting the IRA money and non IRA money directed in proper way can help reduce a lot of taxes.

How to Shelter Your Retirement Money From Estate Taxes

Many of you have reached age 70 ½ and still taking only the required minimum distributions from their IRA’s. By doing so they have reduced the tax liability in current situation but they have increased the tax liability for a later date by letting money grow. This creates a double taxation of income tax and the estate tax.

Many retirees have benefited by increased values in their homes as well as their investments in 1990’s thus far. As a result of this the estate values of many have grown and may be subject to estate taxation. Your IRA could be double taxed. It could have income tax of up to 35% in 2004 and an estate tax of up to 48% in 2004. How can you avoid this? There is a way.

A hypothetical situation. I single IRA owner 2ge 70 has a seventeen year of life expectancy (per IRS pub. 590 2003). If he has 1 Million in IRA and if he only takes a minimum distribution each year in order to pay less taxes. Assume the IRA earns a hypothetical 10% annually. Based on the life expectancy and the interest earned on his money, the IRA balance would grow to $2,315,270. Assuming he has no other assets, the IRA will subject to income tax at rates up to 35% and the estate tax up to 48%.

Here’s how it looks:

Plan Balance $2,315,270

Income tax at 33% $ 764,187

Estate Tax (2004 rate) $ 376,545

Net to Heirs $1,174,988

In this example, 50% of IRA monies were lost to taxes. So by taking very little income today and saving income taxes today, this person created huge monster of estate tax for tomorrow. If he had come to this seminar he could have learned how by taking more distribution and by paying little more in taxes and taking that little extra money that he did not need and investing that in to a estate saver life insurance policy, heirs could have got approximately $400,00 more instead of IRS. This was done just by some simple planning. If the similar situation applies to you, you may want to leave them better off using this technique.

What Investments should Be in Your IRA?

We have seen putting wrong type of investment in their IRA and holding wrong type of investments out side of their IRA. Which should be held where in order to reduce taxes?

The average growth mutual funds have a turnover rate of the portfolio of over 100% per year. In order to get the most favorable capital gains treatment on stock gains, a fund must hold the stock for more than 12 months. Many of these funds are holding many stocks for less than 10 months so they get taxed at 35% because of short term rather than the maximum long term capital gains of 15%. There f ore the high turnover funds are best when held inside your IRA where they are shielded from taxes.

Keep your low turnover mutual funds, such as Index funds out side your IRA. Keep stocks you are holding for long term outside your IRA.

For more Information, please contact-

Mukul (mike) Sheth CAC, CEPC, CIDA
Sigma Senior Resources

18723 Martinique Drive
Houston, Texas, 77058
832-685-7219
Email: sigmaplan@yahoo.com