Stretch IRA

DEFINITION of 'Stretch IRA'

An estate planning concept that is applied to extend the financial life of an Individual Retirement Account (IRA) across multiple generations. A stretch IRA strategy allows the original beneficiary of an IRA to distribute assets to a designated second-generation beneficiary, or even a third- or fourth-generation (or more) beneficiary. By using this strategy, the IRA can be passed on from generation to generation while beneficiaries enjoy tax-deferred and/or tax-free growth as long as possible. The term "stretch" does not represent a specific type of IRA; rather it is a financial strategy that allows people to stretch out the life – and therefore the tax advantages – of an IRA.

BREAKING DOWN 'Stretch IRA'

Stretching out an IRA gives the funds in the IRA more time – potentially decades – to compound tax-deferred. This provides the opportunity to grow the funds significantly for future generations. With a traditional IRA, the owner has to begin taking the required minimum distribution (RMD) by April 1 of the year after turning 70.5. The RMD is calculated by taking the account balance on December 31 of the previous year, and dividing that number by the number of years left in the owner's life expectancy (as listed in the IRS' "Uniform Lifetime" table.) Each year, the RMD is calculated by dividing the account balance by the remaining life expectancy.

Non-spousal heirs of any age, regardless of the type of IRA, must take RMDs based on their life expectancy. The younger the beneficiary, the lower the RMD, which allows more funds to remain in the IRA to stretch the IRA over time.

However, not all IRAs allow the stretch strategy, and investors should check with their provider or financial institution to determine if beneficiaries will be allowed to take distributions over a life-expectancy period.

RELATED TERMS
  1. Estate Planning

    The collection of preparation tasks that serve to manage an individual's ...
  2. Beneficiary

    Anybody who gains an advantage and/or profits from something. ...
  3. Life Expectancy

    Life expectancy in social science is the statistical age until ...
  4. Extended IRA

    An IRA that allows a second generation beneficiary to continue ...
  5. Heir

    HeirA person who inherits some or all of the estate of another ...
  6. Individual Retirement Account - ...

    An investing tool used by individuals to earn and earmark funds ...
Related Articles
  1. Retirement

    Making Spousal IRA Contributions

    Eligibility requirements, contribution limits and tax deductions all change with one little ring.
  2. Taxes

    Tax Treatment Of Roth IRA Distributions

    Learn the requirements for withdrawing funds tax and penalty free.
  3. Retirement

    Tips On How To Use IRAs To Boost Retirement Savings

    According to the Trustees of the Social Security Fund, the fund will be depleted by 2037. Are you ready?
  4. 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.
  5. Saving and Spending

    What Baby Boomers Need to Know About IRA RMDs

    Mandatory minimum distributions from traditional IRAs and qualified plans cannot be avoided. But there are several ways to minimize their impact.
  6. Your Clients

    How to Construct an Annual Review for Clients

    One of the best things that advisors can provide to clients is an annual review of their financial situation. Here are some guidelines.
  7. Retirement

    Roth IRAs Tutorial

    This comprehensive guide goes through what a Roth IRA is and how to set one up, contribute to it and withdraw from it.
  8. Insurance

    Beware the Sneaky Math of Universal Life Insurance

    Universal life insurance's cash value can be a cash cow – if there's any left. Read on to see if it'll work as an income source after you've retired.
  9. Term

    How Traditional IRAs Work

    A traditional IRA is a tax-advantaged retirement account that includes stocks, bonds, mutual funds and other investments.
  10. Personal Finance

    The Top 6 Books for Estate Planning

    Here are six outstanding books that can help you with your estate planning.
RELATED FAQS
  1. What is the "stretch IRA" concept?

    The "stretch IRA" is not a new IRA account on the market, or even a new investment concept, it is simply a wealth transfer ... Read Full Answer >>
  2. Am I losing the right to collect spousal Social Security benefits before I collect ...

    The short answer is yes, if you haven't reached age 62 by December 31, 2015. The Bipartisan Budget Act of 2015 disrupted ... Read Full Answer >>
  3. Where else can I save for retirement after I max out my Roth IRA?

    With uncertainty about the sustainability of Social Security benefits for future retirees, a lot of responsibility for saving ... Read Full Answer >>
  4. Are estate planning fees tax deductible?

    Estate planning fees may be tax deductible, but only if certain conditions have been met. Internal Revenue Service (IRS) ... Read Full Answer >>
  5. Can personal loans be included in bankruptcy?

    Personal loans from friends, family and employers fall under common categories of debt that can be discharged in the case ... Read Full Answer >>
  6. When can catch-up contributions start?

    Most qualified retirement plans such as 401(k), 403(b) and SIMPLE 401(k) plans, as well as individual retirement accounts ... Read Full Answer >>
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center