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Posted on NOV 9, 2018

Family Wealth Creation & Preservation: Multi-Generational IRA

By Robert L. Warner, Managing Director, The Pilot Program from Johnson Financial Group

Did you know that you might already have a multi‐generational tax shelter that can multiply your family wealth? It's your IRA!

For the pilots I work with, their IRA is typically their single largest asset. They worked hard accumulating those assets and want to make sure they are sufficient for retirement. What they don't always realize is that they can enhance the value of their legacy and make it last for generations with some careful planning. By following five steps you can keep more of what you have built in your IRA, and keep it longer, for you and your family.

Multi‐Generational IRA aka Stretch IRA aka Dynasty IRA

A multi‐generational IRA (MGIRA), also known as a stretch IRA or dynasty IRA, is simply a wealth transfer method that allows you to “stretch” your accumulated IRA assets over a couple of generations. It works best if you don't think you will need all of your IRA assets for retirement income.

  • Your accumulated IRA assets continue to grow tax‐deferred.
  • At age 70 1/2, according to IRA rules, you must take required minimum distributions (RMDs) based on your age and life expectancy.
  • Taking RMDs is important since penalties for not doing so are significant.
  • Most of the pilots I work with name their spouse as their primary beneficiary.

Upon the pilot's death, the IRA assets then become the spouse's asset. The spouse can do a tax free rollover into their own IRA and subsequently name their own beneficiaries, typically their children. RMDs are now based on the remaining spouse's life expectancy.

Tax Advantages of the Multi‐Generational IRA

What most people don't know is that, upon the remaining spouse's death, the children may be able to take out smaller RMDs using the children's life expectancy table, thereby allowing the IRA assets to continue to grow tax‐deferred. They are not required to liquidate the IRA in a lump sum and pay taxes on a larger amount in a single year. Here is an example of how a dynasty IRA could benefit a family.

Family Wealth (IRA) Infographic
Family Wealth Table

In this example, two children, ages 50 and 40 and one grandchild, age 30, are named equal beneficiaries of a $1.5 million IRA. Each has the option of taking a lump sum distribution of $500,000 from the IRA, which would mean having to pay 50% in taxes because they will be bumped into the highest tax bracket, incurring the maximum tax erosion. Or each could allow the money to stay invested in the IRA, grow tax‐deferred and take the RMDs every year based on their own life expectancy. Notice the difference in total income over a lifetime by choosing the MGIRA approach. A MGIRA is free and available to everyone. You have to know how to establish it, designate the right beneficiaries and communicate properly with family so the right decisions are made.

Five Critical Steps in Creating your Multi‐Generational IRA

  1. Proper beneficiary designations on your IRA account – appropriately naming your spouse, then children and/or grandchildren as beneficiaries (trusts can be beneficiaries too with careful planning)
  2. Estate planning documents (wills, trusts) to support your multi‐generational IRA – all documents need to be in proper order to support the approach
  3. IRA plan document must permit the MGIRA – most IRAs now have language that permit the use of a multi‐generational approach – be sure to verify the language in advance
  4. Make sure you have adequate cash on hand to pay any estate taxes and other settlement expenses – you don't want them to have to tap into IRA assets in order to pay these costs
  5. Retain an advisor to help you plan – an advisor can make sure you will follow all the appropriate steps

The MGIRA approach allows everyone to turn even a modest IRA into a significant asset. Properly managing the distribution of your IRA is the key. If you don't need to spend down your entire IRA, the balance can stay invested and provide income for future generations. You can create your own generational legacy.

Robert Warner
Robert L. Warner is Managing Director, The Pilot Program, Johnson Financial Group and EVP Johnson Wealth, a Johnson Financial Group Company. He is also a Chartered Financial Consultant (ChFC®). He has over 25 years' experience helping clients, including active pilots and their families achieve their retirement and estate planning goals with an emphasis on estate conservation and wealth transfer planning.

Johnson Financial Group and its subsidiaries do not provide tax advice. Please consult your tax advisor with respect to your personal situation. Wealth management services are provided through Johnson Bank and Johnson Wealth Inc., Johnson Financial Group companies. Additional information about Johnson Wealth Inc., a registered investment adviser, and its investment adviser representatives is available at https://www.adviserinfo.sec.gov/. NOT FDIC INSURED | NO BANK GUARANTEE | MAY LOSE VALUE