Here’s a simple way to magnify the amount of your IRA by 10X. The only prerequisite is that you understand a tiny piece of tax law and you do some advanced planning. It involves an inherited IRA so it can either be your IRA that you’re passing down or you could set this up as an heir.

How many times have we heard of adult children who inherit their parents’ IRA only to be taxed to hell and then spend the remaining amount on that new outdoor kitchen? Just me? Ok, well it does happen—maybe not the outdoor kitchen splurge—but you get the idea.

A $200,000 IRA inheritance is usually cashed by the beneficiary all at once. That beneficiary then pays $74,000 in federal tax, $16,000 in state taxes, and the remaining $110,000 is used to pay off debt and remodel their house (or whatever). The original $200,000 was cut down to only $110,000 in actual money to the heirs after giving almost half to the government. We’ll call this the cash out option.

There is a better way to handle receiving money from an inherited IRA. It’s by far the best option to maximize wealth over the heir’s lifetime and should be 10X the amount of money received if done correctly. This option is to take required minimum distributions from the IRA. The IRS allows you (the heir) to take required minimum distributions on the IRA based on your age. We’ll call this the RMD option.

Example of Magnifying Your Retirement Account 10X

Here’s an example using our $200,000 IRA inheritance. Let’s say I’m 40. My remaining parent just passed away and left me a $200,000 IRA. It’s important to note here that the IRA didn’t go to my parent’s estate. This would happen if my parents didn’t have me listed as their beneficiary on the IRA. This is where pre-planning comes in. Tell your parent (if you only have one remaining) to list you as their beneficiary on the IRA. If you have both parents living, you’d want to ask your parents to be listed as the secondary beneficiary. If the secondary beneficiary is left blank, then the IRA goes to the estate, which is what we do not want.

Now instead of cashing out the inherited IRA, you withdraw only the minimum required by law per year. The IRS uses the Single Life Expectancy Table to determine the divisor. For example, a 40-year-old has a life expectancy of an additional 43.6 years. In order to figure out the required minimum distribution, simply take the account value of $200,000 and divide by 43.6. So $4,587 is the minimum amount required for the heir to withdraw in year 1.

Now let the power of market compounding go to work. Your inherited IRA will continue to grow over your lifetime, even as you withdraw money from it every single year. After year 1, your inherited IRA will be worth $209,413 at a 7% rate of return ($200,000 x 7% – RMD of $4,587). After year 2, your inherited IRA will be worth $219,167 and your RMD will be about $4,900. Setting up your inherited IRA this way gives you over a million in value over 30 years, or 10X more than cashing out as soon as you get it.

Should I Invest in a 401K or Other Retirement Account without my Employers Match?

While many employers offer an incentive to their employees in the form of a company match to their 401K or other employer based retirement plans, there are many who do not offer their employees this benefit. If you are one of those employees, you may be unsure whether or not it even makes sense to invest your money in the plan. According to Wealth Builder financial advisors, having your employer match you, whether it is dollar for dollar up to a limit, or a certain percentage of your contributions, can help boost your retirement account. So having to fund your retirement account on your own, may not appeal to you.

While it is ideal that your employer offers a company match, if they don’t then you should still strongly consider investing in a 401K or other available retirement account. Remember, it is your responsibility to prepare for your retirement and to make decisions that will set you up for a long time. Hence, you owe it to yourself to take available opportunities to grow your money. When it comes to investing, time is your best friend. The earlier or sooner you begin, the more your money will grow.

If your employer has a 401K plan, then research the funds within the plan to see what makes sense for you. Do not invest in anything that you do not understand. Many employers offer Target Date investment funds, which is basically a fund that is diversified (containing different types of investment products) that is based on a year in which you anticipate retiring. The farther out your anticipated retirement date is, then the more stocks or riskier investments your portfolio will contain. Riskier investments are more likely to make more money, but they are also more likely to lose value. As your retirement date approaches, the managers of your Target Date investment fund will move to more safer investments, which does not produce as much growth, but protects your investments. Most people with little investment experience tend to choose Target Date investment funds, because they are diversified and managed by a professional investment account manager who makes day to day decisions. However, it should be noted that with any investment, you may lose what you initially put in.

For those with more investing experience, you may want to choose your own investment funds and make your own decision on how much riskier investments to include in your portfolio and how much safer investments to include. Again, if you are not sure what to choose, do your own research and practice due diligence. Seek professional advice if you need to do so.

So while your employer may not offer a company match, I would recommend that you still consider the 401k plan or other retirement accounts, just because of the potential to grow the money that you have today into a substantial amount that will be needed to live well when you are retired. Some people in their mature years work because they love it, others work out of necessity. If you have the chance today to change the direction of your future, think of ways to boost your retirement portfolio, whether it includes your employer’s match or not.

Source : Plato Data Intelligance