Michael Oana is the Chief Investment Officer with Team Oana Investment Advisors. Team Oana is a locally owned boutique investment firm specializing in helping conservative investors. Mr. Oana's Toucan Talk column appears bi- weekly in The Columbia Star. Thanks to recent tax-law changes, you can "stretch" the value of your traditional IRA account for the benefit of future generations.

There used to be one universal rule for estate planning: Don't get caught dead with an Individual Retirement Account (IRA). After years of tax-deferred savings, these accounts came front-loaded with built-up tax liabilities. And under the old laws, those tax bills became due and payable by any non-spousal heirs almost immediately - wiping out as much as 80 percent of an inheritance.

No longer. Changes to the tax code have created tremendous planning opportunities for traditional IRA account owners and their spousal and nonspousal beneficiaries. The right strategy can turn an IRA into a tax-efficient asset transfer that could generate income for your heirs for decades to come.

Loosening of Restrictions

The most important change is that the IRS has revised the formula that determines how much account holders must begin withdrawing from their IRAs when they reach age 70.5. The amount of money you must withdraw is now lower, giving you the ability to continue deferring taxes and compounding the growth so there is more for your heirs.

Spouses, the most commonly named beneficiaries on IRA accounts, have several choices when inheriting an account. They can roll their inheritance into an existing IRA, set up an entirely new IRA account with the assets, or disclaim their right to the account and pass it directly to secondary beneficiaries such as their children.

Consider an example. John passes away with an IRA worth $200,000, naming his wife, Jane, as his primary beneficiary and his two children as contingent beneficiaries. With a spousal rollover, Jane rolls his entire IRA into her own account. She can name her own beneficiaries, and if she doesn't need the income, she can hold the IRA until she has to begin taking required minimum distributions (RMDs) from the account at age 70.5. In the meantime, the assets in the IRA account continue to grow tax-deferred.

Beyond the Spouse

Non-spousal beneficiaries, including unmarried domestic partners, now also have more attractive options available when they inherit an IRA. Under the old law, any non-spousal beneficiary had only two choices - a single lump-sum distribution or a fiveyear distribution plan. Since IRA distributions are taxed as current income, taxes could siphon off a substantial portion of the inherited assets, even under the fiveyear plan.

But current law now allows non-spouse beneficiaries the additional choice of setting up an inherited, or decedent, IRA, and permits them to take RMDs based on their single life expectancies. This stretches the income from the account through their lifetime, allowing the assets to continue growing tax-deferred.

Here's how the math works: John retires when he is 61 with an IRA of $200,000. He and Jane, age 58, don't need the income, so they allow the assets to grow - let's assume an annual rate of 6 percent. At age 70.5 John begins taking RMDs based on his single life expectancy until his death at age 80. Over those 9.5 years, he will have withdrawn $175,000, but Jane will inherit $415,000, thanks to the continued growth.

Intergenerational Payoff

When Jane inherits the IRA, the RMDs are recalculated based on her life expectancy, and she continues taking distributions until her death at age 80, drawing more than $64,000 in income from the account. If their two children, ages 56 and 52 when they inherit, choose to stretch the IRA, they can set up separate accounts, and each can use their own single life expectancy. Together they will draw another $1.27 million in income from that account over the course of their lifetimes.

In this case, the original $200,000 IRA is worth more than $1.5 million in total family income, thanks to careful planning.

The key to stretching the IRA is choosing proper beneficiaries and educating them on how they can use the assets to plan for their own future. It can help open up an intergenerational discussion about estate planning.

Account owners who have plenty of outside assets to pass on to their heirs may want to consider naming their favorite charity as their primary beneficiary. Because charities don't have to worry about those built-up tax liabilities inside the account, they receive the full amount of the IRA tax-free. In addition, those assets stay outside of the estate, trimming the tax bill for the heirs.

With IRAs making up a growing portion of most families' investment portfolios, it is more important than ever that your overall financial and estate plan address the disposition of IRA assets.

Team Oana does not render legal, accounting or tax advice. Please consult your CPA or attorney on such matters. The accuracy and completeness of this material are not guaranteed. The material is distributed solely for information purposes and is not a solicitation of an offer to buy any security or instrument or to participate in any trading strategy.

Team Oana Investment Advisors,Inc., is an independent company with securities offered through Summit Brokerage Services,Inc. Member FINRA & IPC, NASD & SIPC.

Looking for a great guest speaker for your next event? Please call Staci Goins at 803-343-3343 to schedule Mr. Oana to speak for your group.