Capturing the IRA market

By Jason Kestler

Kestler Financial Group, Inc.


If you are looking for an edge to expand your practice, now is the time to position yourself as a distribution expert. The rollover IRA market is big business and is poised to explode over the next several years.

The largest wave of baby boomers will be retiring over the next two decades and will be looking for help rolling their qualified retirement plans (QRPs) into individual retirement accounts (IRAs). The numbers are astounding: approximately four million boomers will retire each year for the next 17 years. This is clearly the fastest growing market segment for the advisory community.

This growth potential far exceeds the expectations we had when we began specializing in retirement distribution planning in 1996. While there are several approaches a client may use to reach their specific goals, many of our clients have implemented the "stretch" IRA technique. We began exploring the perpetuation of the tax-deferred status for IRA beneficiaries when "The Taxpayer Relief Act of 1997" eliminated the 15 percent excise tax on excess accumulations or distributions of IRA funds. This is just one of several tax law changes that impacted IRA planning over the past several years. The most recent development occurred April 16, 2002 with the IRS issuing final regulations for distributions related to qualified retirement plans.

The concept is straightforward: if the IRA owner implements the proper structure prior to death, the heirs can maintain the favorable tax status of the IRA for decades. The benefits are fantastic: rather than the lump sum taxation — with income and estate taxes consuming up to 70 percent of the IRA — the heirs can continue the tax deferred compounding and take income over their remaining life expectancy.

This type of planning is not new, and it is surprising that most advisers and IRA custodians continue to give IRA owners little guidance in this area. This has created a vacuum that is being filled by advisers willing to specialize in retirement distribution planning. And what is not to like? You can provide your clients with a great service while attracting vast sums of money under management.

While the concept is deceptively simple, implementing a strategy successfully requires many issues to be coordinated:

Plan design: What is the best structure for the client whose retirement funds are still in a QRP such as a 401(k), 403(b), 457, pension or profit sharing plan? Should it remain where it is, or will they benefit by rolling to an IRA? One option that doesn't receive enough attention is a Roth conversion.

Cash flow study: Does the client need income from the IRA, or will minimum required distributions and other sources of income satisfy the spending needs? If they are under 59 ½ and need income from the IRA, tax code 72(t) allows for a series of substantially equal payments while avoiding the 10 percent penalty. There are three different calculations which can be used to determine the payment:

1. Minimum distribution method — Under this method, payments are calculated by dividing the prior year's ending account balance by a life expectancy (single life, uniform life or joint and last survivor) using the attained age or ages for the current year. This is the only method of the three where the payment will vary year to year due to the prior year distribution and investment performance.

2. Fixed annuitization method — The distributions for this payout are calculated by determining an age annuity factor based upon the mortality table (Appendix B of Revenue Ruling 2002-62) and a rate of interest not to exceed 120 percent of the federal mid-term rate published by the IRS. These rates can be found on the IRS web site: www.irs.gov/tax_regs/fedrates.html. Since this is a fixed method, once the annual distribution is determined, it may not be changed for the duration of the payout.

3. Fixed amortization method — Payments are determined by amortizing the account balance over the life expectancy (single life, uniform life or joint and last survivor) and a rate of interest not to exceed 120 percent of the federal mid-term rate published by the IRS. As the name indicates, once the annual payment is calculated, it may not be changed for the duration of the payout.

Distribution structure: Who should be the primary, contingent and successor contingent beneficiaries? Are there issues that require special planning such as second marriages, spendthrift beneficiaries, special needs children or grandchildren, and charitable gifting?

Guidance & communication: What documentation is needed to assure that all participants clearly understand what needs to happen in the allotted time frame to achieve the best outcome?

Annual meetings: One thing seniors can count on during their retirement years is change. Changes in family, changes in health, and tax law changes are all issues that should be addressed at least annually with your clients to help them adapt and modify the program implemented for them and their families.

As an adviser specializing in distribution planning, you will be perceived as a valuable consultant helping clients navigate through their retirement years. This status will present cross-selling opportunities, referrals, and a natural introduction to family members who will inherit these assets. By focusing on distribution planning, you will be well-positioned to capture your share of a very lucrative and rapidly growing market.