What is a '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. Inherited IRA

    An individual retirement account that is left to a beneficiary ...
  2. Beneficiary

    Anybody who gains an advantage and/or profits from something. ...
  3. IRA Asset Will

    A document that specifies how the assets in an individual retirement ...
  4. Traditional IRA

    An individual retirement account (IRA) that allows individuals ...
  5. Individual Retirement Account - ...

    An investing tool used by individuals to earn and earmark funds ...
  6. Revoked IRA

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

    6 IRA Tax Changes That Could Impact You Soon

    Here are several potential measures that could come before Congress in 2017 that would negatively impact the tax benefits of IRAs.
  3. Retirement

    11 Things You May Not Know About Your IRA

    These little-known features will help you get the most out of your retirement savings.
  4. Financial Advisor

    Why You Need to Find the Right IRA Beneficiary

    It definitely matters who you pick as your IRA beneficiary—and how you go about it. And in some cases, your best option may be to go with a trust.
  5. Financial Advisor

    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.
  6. 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.
  7. Managing Wealth

    Managing Inherited IRAs: Distributions and Taxes

    If you have inherited an IRA account you don’t need to turn it over to the estate, regardless of what the will says.
  8. Financial Advisor

    Top Estate Planning Tips for 401(k)s and IRAs

    Here's how to avoid estate planning pitfalls when it comes to leaving IRA and 401(k) assets to heirs.
  9. Retirement

    What You Should Know About IRA Beneficiaries: Part 2

    Here's how IRAs, and the beneficiaries you name, work with wills and trusts.
  10. Retirement

    5 Secrets You Didn't Know About Traditional IRAs

    A traditional IRA gives you a current-year tax benefit and future years of tax savings – minus the income restrictions that limit who can have a Roth IRA.
RELATED FAQS
  1. What are the rules when applying a stretch IRA strategy?

    Learn how to apply a stretch strategy to IRA and Roth IRA plans, and how tax-advantaged compounding may provide income for ... Read Answer >>
Hot Definitions
  1. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
  2. Market Capitalization

    The total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying ...
  3. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  4. Mezzanine Financing

    A hybrid of debt and equity financing that is typically used to finance the expansion of existing companies. Mezzanine financing ...
  5. Long Run

    A period of time in which all factors of production and costs are variable. In the long run, firms are able to adjust all ...
  6. Quasi Contract

    A legal agreement created by the courts between two parties who did not have a previous obligation to each other. A normal ...
Trading Center