The Retirement Savings Time Bomb, And How To Defuse It.

Do you have a Retirement Account?

If you have a 401k, 403b, 457 or IRA, then you have been able to take advantage of a wonderful thing called tax deferral.  Uncle Sam allows retirement account holders to defer paying income taxes until the age of 70 ½ or when they start withdrawing from that account, whichever comes first.  Why is tax deferral so wonderful?  Because you get to keep all of the money in your account that you would have otherwise had to pay to Uncle Sam in taxes, allowing you to earn interest on your money and collecting interest on interest year after year.   This compounding growth may ultimately equate to a retirement account becoming the largest asset owned for many.  Thousands of dollars can quickly add up to hundreds of thousands, and can even turn into millions of dollars through triple compounding interests. Think about it; if these accounts are worth thousands or millions now, imagine what they will be worth later, provided they are able to continue to grow, when they are passed to the next generation. 

Do You Have Tax Ticking Time Bomb on Your Hands?

Since retirement accounts are tax deferred, usually not a penny in the account has ever been taxed.  The IRS has been friendly enough to allow you to accumulate wealth for retirement; however, the IRS has plans for you.  Eventually you have to pay the piper and if you don’t know the rules of retirement planning and how to play the game, your heirs may experience what we call a Tax Ticking Time Bomb blow out.  This is when KA-BOOOOOM, they inherit your surplus of money and a lot disappears because they end up paying taxes on the whole account at once.  Why is this bad?  Because instead of keeping most of this money in an account to grow, they end up paying it all to Uncle Sam and never see it again.  Knowing how to play the game can mean a difference between nothing, and thousands, hundreds of thousands or even millions of dollars for your loved ones and heirs!

Is it Time to Make the IRS Your Friend?

Is the IRS your friend?  Many would say, no way!  Well, recently the IRS got a little friendlier.  They changed the rules on how proceeds of an inherited retirement account will be taxed.  It is commonly referred to as a “stretch-out” or “multigenerational” IRA or retirement account.  What this means is (and if done right) the taxes on a retirement account, instead of being paid all at once, can be “stretched out” over the life expectancy of the beneficiary.  Let’s say your son or daughter is 50 years old when they inherit your account.  This means that they may be able to stretch out paying the taxes over approximately 35 years!!

Meaning, they will only be paying taxes a little bit at a time and most of the money stays in the account tax-deferred and continues to grow.  The potential for significant financial security for not only your children but also for your grandchildren is possible through this blow-out preventative strategy made possibly by the IRS.
Need to Avoid the Blow Out?

By putting safe-guards in place you can avoid the blow out disaster.  A blow out will often occur when beneficiaries contact the custodian of the retirement account and inquire about how the claim will be settled.  Commonly, the custodian will send out the death claim paperwork, a beneficiary will fill out and return, and shortly thereafter, they will receive the beneficiary check.  Typically, the first thing the beneficiaries will do with that money is DEPOSIT IT, resulting in a blow out. We can’t say oops, I want to put it back and do this stretch-out thing.  Too late!  Now taxes have to be paid on all of that money, no matter what!

What Should You Do?

Before doing anything, consult a qualified financial professional, who is familiar with estate and retirement distribution planning.  There are strategies available to put in place to make sure that your heirs take advantage of the stretch-out.  If you’re a recent beneficiary, before you cash any check, be sure to consult an expert for tax and inheritance planning.  A little preparation now can diffuse the Tax Ticking Time Bomb looming ahead.

For more information about today’s column and The Retirement Guys, tune-in every Saturday at 12pm on 1230 WCWA and every Sunday at 11am on 1370 WSPD or visit  Securities are offered through NEXT Financial Group Inc., Member FINRA / SIPC.  7135 Sylvania Ave, 2B, Sylvania, Ohio 43560

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