Robert D. House, Certified IRA Specialist

Stretch IRAs

The First Step is taking Stock...

"Stretch" IRAs

In order for your beneficiates to continue enjoying the benefit of tax-deferred growth on IRA assets they inherit from you, they must be allowed to stretch distributions over their life expectancies. This stretch option is available only if allowed under the IRA plan document, and if certain steps are taken. In this article, we provide a high level overview of the stretch concept and the steps that must be taken to ensure that it is available for your IRA.

Stretch IRA Defined

The term "stretch IRA" is not an official term, but is used in the retirement plans industry to refer to the ability of beneficiaries to stretch IRA distributions over applicable life expectancies. For instance, assume that an individual inherits IRA assets and, based on his age, the regulations allows him to stretch distributions over a 30-year period. This means that providing he withdraws 1/30th of the IRA balance each year, he is allowed to enjoy tax deferred growth (or tax free in the case of a Roth IRA) on investments of the remaining balance in the IRA for approximately 30 years.

 

The Stretch Limit

An inherited IRA cannot be stretched beyond the initial applicable life expectancy. In fact, all successor beneficiaries are subject to the life expectancy period that applies to the first beneficiary. The following example illustrates:

A 56-year-old individual, let's call him Tim, inherited an IRA from his father. Tim was required to begin distributions from his inherited IRA the next year, when he was 57 years old and his life expectancy was 27.9 years. Tim died a year later. Tim's successor beneficiary, who is his 25-year-old son Jim, may continue distributions over Tim's remaining life expectancy. Jim cannot use his own life expectancy, because he was not the fist generation beneficiary of the IRA.

Spouse Beneficiaries And Stretch IRAs

A spouse beneficiary may elect to treat an inherited IRA as his/her own. Such an election would treat the beneficiary designation by the spouse as the first-generation beneficiary. For instance if Tim, in the example above, was the surviving spouse of the deceased IRA owner, and elected to treat the IRA as his own, the IRA would maintain no trace of ownership to the original owner. Consequently, Jim would be able to use his life expectancy (not his father's) to calculate post-death distributions. This would allow Jim to stretch distributions over his life expectancy of approximately 58 years, instead of the 26.7 years that would apply if he were a second-generation beneficiary.

What if you IRA does not allow the Stretch

Most financial service institutions do allow beneficiaries to stretch distributions over the applicable life expectancies. But unfortunately, not all do. In most cases, the IRA plan documents will include any applicable provisions. But to be sure, check with your financial institution to determine whether your IRA allows the stretch. Bear in mind that your financial institution may use a different term, such as multigenerational IRA, legacy IRA or extended IRA. Some not use a specific term, but still offer the provision. The key is to ask the right questions and make sure the answers provided are what you need to hear. If your financial institution does not offer the stretch option, you may want to consider transferring your IRA to a financial institution that does.

Conclusion

The stretch option is one of the most important financial and estate planning tools for IRAs. Be sure to review your IRA plan document carefully and make sure it is available before signing the agreement. Please do not hesitate to contact us if you need professional assistance, including assistance with reviewing your IRA plan document to ensure it meets your financial and estate planning needs.

 

Robert House