What is the "stretch IRA" concept?

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January 2017
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A Stretch IRA’s main purpose is to extend the period of tax-deferral. It is classified as a wealth transfer strategy that strives to extend the period of time that the assets within the IRA continue to grow tax-free.

This strategy is most commonly used by individuals who aren’t in need of the extra income or who plan to pass on a legacy to their heirs in a tax-efficient fashion.

How does it work?

The owner of the IRA must first name a beneficiary, generally, a spouse, child, or grandchild, and then only the legally required minimum distributions are taken from the account each year.

Pros

  • Lifelong Income: A stretch IRA could potentially provide a lifetime of income to a beneficiary or beneficiaries.
  • Minimized Tax Liability: The total tax paid may be lessened due to taking smaller distributions over an extended period of time rather than as a single lump sum.
  • Tax-Deferred Growth: Extending the period of time in which distributions are made lengthens the time in which assets have to grow tax-free and increases the amount that beneficiaries receive.

Cons

  • Death of Beneficiary: A beneficiary may not live a normal life expectancy.
  • Change in Tax Laws: Changes in laws or regulations could have detrimental effects on the owner or beneficiaries.
  • Investment Returns: As with any investment, losses or inflation could eat into the value of future distributions.

Setting up a stretch IRA should be considered carefully and with a financial professional because many different factors need to be evaluated.

 

Best of luck!

Jack Brkich III, CFP

January 2017
January 2017
November 2009
January 2017