Required Minimum Distributions & Smart 529 Plans -9/18/08

INTRO: You’ve been incubating a nice nest egg for retirement.  But now the law says you’re required to hatch some of those eggs.  Is it “cheap - cheap” to want to keep your money longer?  A little birdie told me the answer is no. 

1. WHAT ARE REQUIRED MINIMUM DISTRIBUTIONS?

2. THAT’S A GOOD THING, RIGHT? DON’T WE WANT TO START GETTING BACK THE MONEY WE’VE PUT AWAY?

A. Yes, if you need it for living expenses.

B. If you don’t need it for living expenses, then you have this extra money that now you have to pay double taxes on.

• Remember, the money you put in your IRA was tax deferred.  When you take the money out, you pay tax on the withdrawal.  That’s tax #1.
• And Uncle Sam says you have to take this money out – or you could face a penalty of 50%.
• Plus, now that you’ve taken it out of your IRA you aren’t allowed to put it into another retirement account.  So you pay tax on the interest or dividends the money earns in future years.  That’s tax #2.

3. SO, IF WE DON’T NEED THE EXTRA MONEY, ARE WE STUCK? DO WE HAVE ANY OTHER OPTIONS BESIDES PAYING THE DOUBLE TAX?

A. Yes. Here’s an idea – establish college savings plans for the grandkids - a Smart 529 Plan.

• The money grows tax deferred.  So you don’t pay the second tax on the interest or dividend generated by your investments. [Do you still pay the first tax?]
•  You are in control
  1. the grandkids don’t own the assets
  2. they are simply the beneficiary
  3. you can change beneficiaries
• Since the plan is in your name, it shouldn’t impact other financial aid your grandchild may be eligible for
• Helps your grandkids avoid crushing debt upon graduation
• When they use the money for their education, there’s no tax.

4. WHEN CAN YOU START INVESTING FOR THE GRANDCHILD?

A. As with all investments, the sooner the better.

B. The chart shows how much investing $300 per month at an assumed rate of 7%, can grow to.

C. Waiting just 5 years involves missing almost half of the potential earnings.

CLOSE: They call them “Smart 529" plans for a reason!