IRA Spend-Down – Version 3.00

All data entry cells show up in red.

It is likely that most people with significant accumulations in their IRA actually never use the money. It is most likely the desire of these IRA owners to get as much of this money to the next generation as possible. However, most IRA owners do not realize that their account has two layers of tax that will be eventually be assessed on the account, if the account is in tact at the death of the owner. The IRA is taxed as part of the estate of the owner and it is taxed as ordinary income to any non-spouse beneficiary. If this occurs, it is possible that as much as 80% of the account balance could be lost to taxes. It is obvious that a "do nothing" approach to addressing the IRA is not a reasonable solution. The do nothing approach is in part interrupted by the fact that mandatory withdrawals begin at age 70 ½, subjecting the funds to ordinary income tax, one way or the other.

There may be several reasonable solutions used to address these problems that exist with the IRA. One strategy that can be considered is a systematic spend-down of the account for the purpose of funding a wealth replacement insurance trust, or simply for the purpose of supplying income for the IRA owner. A systematic spend-down of course subjects the cash flow to ordinary income tax. However, as stated above, due to mandatory distributions the funds will eventually be subject to this tax anyway. It could be that in order for the owner to eliminate one layer of potential (estate) tax it is necessary to accept the other layer of (ordinary income) tax. If this net-after-tax cash flow is used to fund a wealth replacement insurance trust it may be possible to replace the value of the IRA to the heirs on a tax-free basis.

This planning model provides a guideline for the IRA owner that wants to begin a systematic spend-down to fund a wealth replacement strategy.

Age: Enter the current age of the IRA owner.

Current Year: Enter the current calendar year.

IRA Account Balance: Enter dollar amount that is in the IRA account now.

Assumed Net Investment Return In IRA Account: Enter the return you anticipate averaging in the IRA net of fees and expenses over the entire distribution period.

Spend-Down Period (Yrs): Enter the term of years over which you want to accomplish the spend-down. The model will accommodate 1-30 years.

What % of Original Remains: Enter here the amount of the original account balance that you want to remain in the IRA after the spend-down period is over. This can be 0%.

Ordinary Income Tax Bracket: Enter here the percentage of taxes that you expect to pay on all IRA distributions over the entire spend-down period. Keep in mind that when determining the tax bracket that you should include all income from all sources in addition to the IRA withdrawals.

The Model will accommodate up to a 30-year spend-down. The distribution table in the bottom of the model outlines the gross IRA withdrawal, any applicable taxes and the net cash flow available for any wealth replacement strategy or spendable income. At the bottom of the model you will see totals for the entire distribution, total taxes paid, and the total available for life premium or spending.

Keep in mind that this model is not intended to calculate the minimum distribution requirement after age 70 ½.