“Stretch” IRA

A “stretch” IRA is an IRA that is set up so that the period of tax-deferred earnings on the assets of the IRA can be extended. In other words, a "stretch IRA” stretches out the time that money can stay in an IRA. A stretch IRA can be established if you have not reached age 70 ½ . It may be worth consideration if you do not plan to withdraw assets from your IRA during your lifetime (except for the minimum withdrawals required by law after age 70 ½ for traditional IRAs). At your death, your heirs will be provided with the longest allowable period of tax-deferral before all the assets in the IRA must be distributed. The benefit of stretching your IRA is that your heirs can save money in estate taxes.

Think of the estate plan as having three generations: You (and your spouse, if you are married) are the first generation; the second generation consists of your children or other heirs; and their beneficiaries (for example, your grandchildren) are the third generation. The stretch occurs in the second and third generations.

If you die, your spouse, as beneficiary, can roll the IRA into his/her own name and name a younger beneficiary, such as your child. Distributions, starting at age 70 ½, will be based on their combined life expectancies. When your spouse dies, your spouse’s beneficiary will name another beneficiary, such as your grandchild. In the event of your child’s death before the minimum distributions have been exhausted, the minimum distribution to your grandchild would remain the same amount as if your child had not died. It must be remembered that the names of the account holder and the beneficiary must appear on the stretch account.

For example, Bob has an IRA and names his daughter Mary as beneficiary and his grandson Felix as contingent beneficiary. When Bob dies, Mary can take the IRA minimum distributions over her life expectancy. If Mary is 45 years old, the payout, according to the IRA life expectancy tables, is 38 years. If Mary dies at age 50, her son Felix can elect to receive the distributions of the IRA for the remaining 33 years of Mary’s life expectancy, as if Mary had not died.

Stretching out the minimum distribution will defer taxes, and the account can continue to grow tax-deferred, thus also stretching the value. Taking money in annual distributions will also eliminate the need for one’s heirs to take the IRA funds in a lump sum.