Stretching distributions from qualified and non-qualified retirement plans is a hot topic among financial advisors, marketing organizations and insurance companies, as the amount of qualified money in IRAs, 401(k)s and all other qualified accounts has grown to astounding levels.
According to the Investment Company Institute’s “2007 Investment Company Fact Book,” the total amount of qualified money in America totaled $16.4 trillion at the end of 2006. That represents an increase of approximately 12 percent in just one year.
So where is all of this money? ICI’s “2006 Investment Company Fact Book” points out that 83 percent is in mutual funds and securities, 7 percent is in banks and thrifts, and a mere 9 percent is held by insurance companies. This creates a tremendous opportunity for annuity sales, and some insurance companies and marketing organizations are preparing to get their fair share of the IRA distribution market.
LIMRA, in Research Briefing No. 8, Sept. 2005, “Retirement Distribution Sales Force Training,” spelled out the opportunities and challenges facing companies and producers who want to tap into this gigantic market. The first of 78 million baby boomers began turning 59?? 1/2 in 2005, and they now can make withdrawals from their qualified retirement accounts without penalties.
However, 85 percent of boomers nearing retirement have no formal plans to transform their retirement savings into a steady stream of retirement income. Although annuity insurers are developing strategies for the distribution market, many advisors are failing to go beyond their familiar accumulation strategies and are not developing expertise in the distribution market. In addition, there are approximately 4,000 retirees turning 70?? 1/2 every day; they must begin taking required minimum distributions from their retirement accounts and, like the boomers, have no formal plans for distribution.
What is the solution? For many of those nearing retirement, the best approach may be the stretch or multigenerational IRA. New, simplified IRA distribution rules went into effect in 2002. The stretch concept is simple and can generate multiple lifetime streams of income for IRA owners and their beneficiaries (spouse, children and grandchildren). In simple terms, a typical family with two children and two grandchildren can stretch the IRA distributions over three generations. Spreading the distributions allows them to continue to earn interest on money that otherwise would have been paid to the IRS. At just a 5 percent rate of return, a $300,000 IRA can pay out more than $1.5 million to the IRA owner and his beneficiaries.
This is all possible because of two important changes in the IRA distribution rules that took effect in 2002.
1. The RMD beginning at age 70?? 1/2 was reduced by almost 50 percent. If less money is withdrawn from the IRA, there will be more left in the account for the children and grandchildren after the death of the owner and spouse.
2. The children and grandchildren who are likely to be the beneficiaries now can spread their inheritance over their life expectancies. They no longer must pay the tax in one to five years. Advisors who are trained in this distribution strategy will easily capture and retain large IRA accounts.