Stretch IRA

Stretch IRA has been in the Internal Revenue Code (IRS play book) for many years. It is not a new type of IRA or even an investment strategy; it is a very efficient wealth transfer strategy.

Stretch IRA rules require account owners to start making Required Minimum Distributions (RMD) on retirement accounts (IRA) no later than April 1st the year after you turn 70 1/2. Those distributions are based on the IRS Uniform Lifetime table, which assigns a life expectancy number to every age. Each year after age 70 1/2 you divide the prior year December 31st account balance by the number from the Uniform Table assigns to your age to determine your RMD for this year. Once RMD has started, it can’t be turned off. When you pass away, your beneficiary has the opportunity to ‘reset” the distribution amount based on their age thereby reducing the amount of money required to be taken out of the account

Traditionally the IRS allows someone inheriting a retirement account (IRA) to access the money and pay the taxes in 3 ways. Only the Stretch allows for wealth transfer; the others cover liquidation of the account. The Stretch continues the IRA’s most important tax benefit – tax deferral - for another generation, or more. All future distributions are based on the beneficiary’s current age, not the original account owners - the younger the beneficiary the bigger the benefit and the longer the money can compound! It is important to note that taking this option in no-way reduces access to the money. Since taxes are only due on what is taken out of the account. The Stretch establishes a Required Minimum Distribution based on the beneficiary’s life, if you take more you will simply pay more taxes on a larger distribution.

In situations where wealth is intended to be transferred generationally, planning for the use of a Stretch IRA can be an effective way for families with highly-appreciated IRA accounts to lower the amount of year-over-year taxation on the IRA to their beneficiaries. In doing so, they may be able to retain a larger portion of the assets for the benefit of their estate rather than being paid out in taxes.

Prior to implementing any financial strategy individuals should consider their investment objective, time horizon and tolerance for risk. Stretch IRAs work best for investors who will not need the money in their IRA account during their lifetime for their own retirement needs.

Distributions from traditional IRAs are taxed as ordinary income. Distributions prior to age 59 1/2 are subject to a 10% federal income tax penalty (this rule does not apply to IRA beneficiaries, who must begin taking minimum distributions no later than December 31 of the year following the original owner's death).

Go to top