15 Nov

Stretch it Out

November 15, 2013

I’m not talking about an exercise plan. I’m talking about stretching the benefits of your IRA.

Many people will not spend all the money in their IRAs and they are looking for multigenerational planning techniques. A Stretch IRA can be the perfect solution. A stretch IRA is a wealth transfer method that allows you to potentially “stretch” your IRA over several future generations.

As an IRA owner, you are required to begin required minimum distributions (RMDs) when you reach age 70 ½. These distributions are calculated using a formula based on your life expectancy. When the owner dies, the IRA will pass to the primary beneficiary. It is usually a spouse or child. If your spouse is over 70 ½ then his or her RMD is recalculated based on their life expectancy. The younger you are, the less you have to take out.

Now follow that to the next generation. Say you name your child as the beneficiary of your IRA. The tax-deferred growth can continue if they “stretch” the IRA. This occurs when your beneficiary takes only the required minimum distributions from the IRA. The RMD is now based on their age rather than yours. This means the distribution amount will be much lower because of the beneficiary’s younger age.

Here is an example:

  • An account owner is 52 years old when he rolls his employer retirement plan into a traditional IRA. He names his wife as the beneficiary. His wife is 50 years old.
  • When the account owner turns 70 ½ he starts his required minimum distributions.
  • The account owner dies when he is 75 years old. His wife is only 73 at the time. She rolls the IRA to her IRA and begins taking her RMD. The RMD will now decrease since she is younger. This means more money can stay in the IRA and continue to grow tax deferred. She names her son as her primary beneficiary.
  • She dies five years later and her son is 48 years old. He forms a “stretch” IRA and continues taking RMDs based on his life expectancy. The RMD is much lower because of his younger age. Again, more money can stay in the IRA to grow.

You can see how this IRA can continue to grow tax deferred for many generations. Talk with your financial advisor and tax advisor to learn if this strategy will work for you.

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