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THE BASICS OF STRETCH IRAs
You can plan to have your heirs inherit your IRA assets.
provided by KMA Wealth Management, LLC
Can an IRA keep growing for a century or more? In theory, it can. Some people are planning
to “stretch” their Individual Retirement Accounts over generations, so that their heirs can receive
IRA assets accumulated after decades of tax-deferred or tax-free growth. A stretch IRA can
potentially create a legacy of wealth to benefit your heirs, and it could also help to reduce your
estate taxes.
Usually, this is a choice of the high net worth investor. Typically, an individual, couple or family
has amassed sizable retirement savings – so sizable that they don’t need to withdraw the bulk of
their IRA assets during their lifetimes.
How does this work? Simply put, a stretch IRA is a Roth or traditional IRA with assets that pass
from the original account owner to a younger beneficiary when the original account owner dies.
The beneficiary can be a spouse or a non-spousal heir (or in some cases, not a person at all but a
“see-through” trust.)1
If the beneficiary is a person, this younger beneficiary will have a longer life expectancy than the
initial IRA owner, and therefore may elect to “stretch” the IRA by receiving smaller required
minimum distributions (RMDs) each year of his or her life span. This will leave money in the
IRA and permit ongoing tax-deferred growth – or tax-free growth, in the case of a Roth IRA.
In fact, since you don’t have to take RMDs from a Roth IRA at age 70½, you could opt to let
your Roth IRA grow untapped for a lifetime. At your death, your beneficiaries could then stretch
payouts over their life expectancies without having to pay tax on withdrawals.2
What options do the beneficiaries have? Well, the rules governing inherited IRAs are quite
complex. The explanation below is simply a summary, and should not be taken as any kind of
advice or guide.
If you have named your spouse as the beneficiary of your IRA, your spouse can roll over the
inherited IRA assets into his or her own IRA after your death (presuming they don’t need the
money).
If you die before age 70½, your spouse can treat the inherited IRA as his or her own and make
contributions and withdrawals. Or, instead of treating the IRA as his or her own, your spouse can
elect to begin receiving distributions on either December 31st of the calendar year following
your death, or the date that you would have been age 70½, whichever date is later.
Greg Williams is a registered principal of and offering securities through Securities Service Network, Inc., member FINRA/SIPC.
Fee based advisory services are offered through SSN Advisory, Inc., a registered investment advisor.
Office of Supervisory Jurisdiction: 10207 Technology Drive, Suite One, Knoxville, TN 37932 (865) 777-4677
If your beneficiary is non-spousal, he or she cannot treat the IRA as his or her own, and cannot
make contributions to it or rollovers into or out of it.3 A non-spousal beneficiary can either take
the lump sum and pay taxes on it, or transfer the IRA assets to an IRA distribution account.
If your non-spousal beneficiary elects to set up a distribution account and you have passed away
before age 70½, he or she must follow either the one-year rule or the five-year rule.
Under the one-year rule, annual distributions are based on the life expectancy of the designated
beneficiary and must start by December 31st of the year following the original IRA owner’s
death. In this way, your beneficiary can stretch out the distributions over his or her life
expectancy, which can allow more of the inherited IRA assets to remain in the IRA and enjoy
tax-deferred or tax-free growth.
Under the five-year rule, there are no minimum annual distribution requirements, but the
beneficiary must withdraw their full interest by the end of the fifth year following the owner’s
death.
The beneficiary can be determined even after the original IRA owner dies – if there is somehow
no named beneficiary, you have until the end of the year following the death of the primary IRA
owner to establish one.4 But it is vital to establish a beneficiary during your lifetime: if you
don’t, your IRA assets could end up in your estate, and that will leave your heirs with two
choices. If you pass away after age 70½, the RMDs from the IRA are calculated according to
what would have been your remaining life expectancy. If you pass away before age 70½, the
five-year rule applies: your heirs have to cash out the entire IRA by the end of the fifth year
following the year of your death.2
Things to think about. The decision to stretch your IRA cannot be made casually. A beneficiary
must be selected with great care, and there is always the possibility that you may end up
withdrawing all of your IRA assets during your lifetime. A stretch IRA strategy assumes that
your beneficiary won’t deplete the IRA assets, and it also assumes a constant rate of return for
the account over the years. It’s also worth remembering that stretch IRA planning is based on
today’s tax laws, not the tax laws of tomorrow.
If you are interested in stretching your IRA, you must find a truly qualified financial advisor to
help you. While many financial advisors know something of the rules and regulations governing
stretch IRAs, look for an advisor with an advanced education in IRA planning.
All information is believed to be from reliable sources; however, we make no representation as
to its completeness or accuracy. Please consult your Financial Advisor for further information.
Citations.
1
investmentnews.com/apps/pbcs.dll/article?AID=/20080501/REG/74256949/1031/RETIREMEN
T
2
kiplinger.com/retirementreport/features/archives/2006/06/Cover_Jun2006_03_01.html
3
irs.gov/pub/irs-pdf/p590.pdf
4
moneycentral.msn.com/content/Taxes/Taxshelters/P33760.asp
Greg Williams is a registered principal of and offering securities through Securities Service Network, Inc., member FINRA/SIPC.
Fee based advisory services are offered through SSN Advisory, Inc., a registered investment advisor.
Office of Supervisory Jurisdiction: 10207 Technology Drive, Suite One, Knoxville, TN 37932 (865) 777-4677
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The Basics of Stretch IRA's