A:

The "stretch IRA" is not a new IRA account on the market, or even a new investment concept, it is simply a wealth transfer method that allows you the potential to "stretch" your IRA over several future generations. As an IRA owner, you are typically required to take minimum distributions from your IRA at age 70.5 based on an IRS life expectancy table. If you are fortunate enough to inherit someone else's IRA, you will be required to take minimum distributions each year from the IRA account based on your life expectancy figure - regardless of your age.

IRA accounts at death of the owner pass by contract or beneficiary designation. It is typical practice for most IRA owners to name their spouse as the primary IRA beneficiary and their children as the contingent beneficiaries. While there is nothing wrong with this strategy, it might require the spouse to take more taxable income from the IRA than what he/she really needs when he/she inherits the IRA. If income needs are not an issue for the spouse and children-, then naming younger beneficiaries (such as grandchildren or great-grandchildren) allows you to stretch the value of the IRA out over generations. This is possible because grandchildren are younger and their required minimum distribution (RMD) figure will be much less at a younger age (see example below).

Example:
Traditional IRA worth $500,000 on 12/31/2009

Owner: Dave (deceased 12/1/2009); *IRA Inherited by:
a) Spouse: Mary (Age 73 in 2010)- Mary will have to take an RMD of $20,234 in year 2010
b) Son: Mike (Age 55 in 2010)- Mike will have to take an RMD of $16,892 in year 2010
c) Granddaughter: Julia (Age 28 in 2010)- Julia will have to take an RMD of $9,042 in year 2010
d) Great Grandson: Dallas (Age 6 in 2010)- Dallas will have to take an RMD of $6,519 in year 2010

*Each beneficiary will have to continue to take the RMD each year thereafter based on the new life expectancy figure which must be computed each year from the IRS Publication 590 (IRA's) from the Appendix C- Life Expectancy Tables section.

If Dave is careful in beneficiary selection, the younger the beneficiary the less the RMD payment. This allows the IRA value to continue to grow tax-deferred, thus allowing it to stretch to several generations.

Find out how your beneficiaries can enjoy tax-deferred growth for as long as possible by referring to Want To Leave Money To Your Family? Stretch Your IRA.

This question was answered by Steven Merkel.

RELATED FAQS
  1. How do I transfer my 401k funds to my family?

    I was a business owner and retired in 2015. My 401k is still active. I'm 55 years old, but have terminal cancer. The money ... Read Answer >>
  2. I want to take advantage of retirement savings. Can I contribute $6K to a Roth IRA, ...

  3. Can I put my IRA in a trust?

    Learn the proper way to transfer ownership of your IRA to a trust. Consider how naming the trust as a beneficiary affects ... Read Answer >>
  4. How do I open an IRA?

    Opening a Roth or Traditional IRA online with a minimal deposit takes less than 15 minutes when starting an account with ... Read Answer >>
  5. Can an IRA be used as security for a loan?

    The IRS prohibits the use of an IRA as security for a loan. If an individual borrows money against his or her IRA, the IRA ... Read Answer >>
  6. Are Simple IRA taxes the same as traditional IRA taxes?

    Discover the tax difference between a SIMPLE IRA and a traditional IRA before you determine which retirement plan is the ... Read Answer >>
Related Articles
  1. Retirement

    Want To Leave Money To Your Family? Stretch Your IRA

    Find out how your beneficiaries can enjoy tax-deferred growth for as long as possible.
  2. Retirement

    Inheriting an IRA: Tax Rules You Should Know

    Don’t get hit with a 50% penalty because you don’t know the required minimum distribution (RMD) rules for IRA beneficiaries.
  3. Retirement

    Traditional IRAs: Distributions

    By Denise ApplebyDistributions from Traditional IRAs must occur eventually. Until the owner reaches the mandatory distribution age, distributions are optional. The tax and penalty applied to ...
  4. Retirement

    An Overview Of Retirement Plan RMDs

    Make your deadlines for required minimum distributions and save more of your nest egg.
  5. Retirement

    Strategic Ways To Distribute Your RMD

    We give you some tips on preserving your nest egg in the face of unavoidable withdrawals.
  6. Retirement

    Inherited IRA and 401(k) Rules: Don't Run Afoul

    What you need to know when it comes to the complex rules for inherited IRAs and 401(k)s.
  7. Retirement

    Traditional IRAs: Eligibility Requirements

    By Denise ApplebyWho Can Establish a Traditional IRA?Any individual who has taxable compensation or self-employment income (earned by sole proprietors and partners) for the year, and will not ...
  8. Retirement

    How an IRA Works After Retirement

    You've read a lot about saving for your future retirement with IRAs. But what happens to the account when the future is here, and you actually retire?
  9. Retirement

    Roth vs. Traditional IRA: Which Is Right For You?

    To answer this question, you need to consider several of the factors we outline here.
  10. Retirement

    Designating A Trust As Retirement Beneficiary

    Designating a trust as your IRA beneficiary can be beneficial, but it requires proper planning to avoid problems.
RELATED TERMS
  1. Stretch IRA

    An estate planning concept that is applied to extend the financial ...
  2. Extended IRA

    An IRA that allows a second generation beneficiary to continue ...
  3. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  4. Required Minimum Distribution - RMD

    The amount that Traditional, SEP and SIMPLE IRA owners and qualified ...
  5. Revoked IRA

    An IRA holder may revoke an IRA within the 7 days after the IRA ...
  6. IRA Transfer

    The transfer of funds from an Individual Retirement Account (IRA) ...
Trading Center