Whether you’ve accumulated assets in an Individual Retirement Account (IRA) by making regular contributions through the years, or by “rolling over” a lump-sum distribution from a workplace retirement plan, you may want to consider whether you’ll actually use all of that money to support yourself during retirement.
If the answer is “no,” then you’ll need to determine the most efficient way of leaving the money to your heirs. For many Americans, transferring wealth with a “stretch” IRA is an ideal strategy.
What Is a Stretch IRA?
A stretch IRA is not a specialized product, but rather a traditional IRA or Roth IRA that has language written into its documentation allowing for continued tax deferral on any income and distribution of IRA assets to a primary – and perhaps even secondary beneficiaries – over a longer period of time. Without the presence of “stretch” language, assets remaining in an IRA may have to be distributed on a more aggressive basis upon the death of the IRA owner. The stretch IRA concept can be especially valuable to non-spousal beneficiaries who do not have the same ownership rights to IRA assets as do spousal beneficiaries.
Although the phrase “stretch IRA” has caught on, financial institutions offer IRAs with similar provisions under a variety of names including legacy IRAs, multigenerational IRAs and perpetual IRAs. Keep in mind that even when different financial institutions use the same terminology, they can mean slightly different things, so you need to look closely at the fine print.
Using a stretch IRA strategy has no effect on the Traditional IRA account owner’s minimum distribution requirements (RMDs), which continue to be based on his or her life expectancy. Once the account owner dies, however, the primary non-spousal beneficiary — say a child or grandchild — may begin taking RMDs based on his or her own life expectancy. The ability of beneficiaries to extend the life of the IRA in this fashion means that the money you accumulate in your IRA and leave to heirs has the potential to last longer and produce more wealth for younger generations. Of course, there is no way to guarantee the effect your beneficiaries may have on the inherited IRA. They may choose to withdraw early, or tax laws could change. Beneficiary distribution options depend on a number of factors such as the type and age of the beneficiary named, the relationship of the beneficiary to the decedent at death and may result in the inability to “stretch” a decedent’s IRA. Costs including custodial fees may be incurred on a specified frequency while the account remains open.
While it’s true that regulatory changes have made it much easier to incorporate a stretch IRA into your financial planning initiatives, it’s always a good idea to speak with a financial professional before implementing any new strategy.
I welcome the opportunity to schedule a meeting with you to discuss how investing in IRAs may benefit you.