What is the "stretch IRA" concept?

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January 2017
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A “Stretch IRA” refers to an inherited IRA  It takes an IRA owner several decades to accumulate a large sizeable IRA balance. When he/she passes away, the IRS gives the beneficiaries options to withdraw. When chosen wisely, the original owner’s IRA balance can last a lot longer (a few more decades) in the hands of new and younger beneficiary. Let’s use an example to illustrate what “stretch” means.

Mark dies at age 80; his spouse Sandra, age 75, is the beneficiary. Sandra rolls the benefit into her own IRA and names their only child, Alex, as the beneficiary. During Sandra’s life, the uniform table is used to calculate her RMD (required minimum distribution). At age 76, the applicable distribution period or the factor is 22.0 (see the Uniform Table for individual aged 76). When Sandra dies at 86, Alex becomes the non-spousal beneficiary.

Alex continues to take Sandra’s RMD at her death year, but Alex will use the “Single Life Table” to calculate his own RMD staring the year after his mother’s death. At age 53, the factor used to calculate his RMD is 31.4 (using the “Single Life Table”). Now, Alex can use the account balance as of 12/31 from the year of Sandra’s death and divide 31.4 for his RMD. In subsequent years, the applicable distribution period is the life expectancy from the previous year less one. Using Alex’ example, the factor for the third year RMD is 30.4 (31.4-1), the fourth year is 29.4 (30.4-1), and so forth.

Now the remaining distribution period is fixed, even if Alex dies prior to the end of that time period. His beneficiaries could continue distributions over the remaining period. In this example, the minimum distributions are spread over a 50-year period! This is how an IRA “stretches.” Of course, a beneficiary can take one year or five years to clear up the account, but imagine how much the tax that beneficiary has to pay. Using the stretch method, the beneficiary pays the least amount of tax and preserves the legacy. Best!

January 2017
January 2017
January 2017
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