In a recent series of posts about Inherited IRA's, I wrote about various planning options that one might have when an IRA is passed on to you as the beneficiary. If you missed the series, or would like to refresh your memory, feel free to check out part one, two and three.
This time around, I want to focus on the other side of the equation; how a "Stretch IRA" might be used in regard to your own planning to make sure remaining assets are optimized for the use of your beneficiaries.
So, how do you create a "Stretch IRA" in the first place, and why would you want it?
A Stretch IRA is not a special kind of IRA; the term "stretch" is simply referring to provisions that can give your IRA the potential to last or "stretch" over several generations. Just about any IRA (Roth or Traditional) can include stretch provisions, but not all do.
Why is "stretching" important?
Earnings in your IRA grow tax deferred. Over time, this can really help you to accumulate a significant amount of funds. Later in life, if you're able to support yourself without tapping in to your IRA, you might want the tax deferred growth to continue as long as possible and you may also want your heirs to benefit from this for as long as possible.
Keep in mind though, that Required Minimum Distribution (RMD) rules will apply during your life after age 70.5 (for traditional IRA's), and will continue after your death.
To put it simply; the goal of 'stretching' your IRA is to make sure that your beneficiary can take the distributions over the maximum period of time possible that would be allowed by the RMD rules.
There are two key stretch provisions to consider when considering your planning goals that I'd like to cover.
The RMD rules allow your beneficiary to take distributions from an inherited IRA over a fixed period of time that is based on their own life expectancy.
For example, if your beneficiary is 20 years old in the year following your death, they can take the payments over 63 additional year, which of course, is a very long time. However, even though the RMD rules allow this 'stretch', your particular IRA may not. This is something that your CFP® can help you figure out.
What happens if your beneficiary elects to take the distributions over their own life expectancy but dies a few years later with funds still in the inherited IRA?
If the IRA doesn't address what happens in this situation, then the balance is typically paid to the estate. Fortunately though, IRA providers are increasingly allowing an original beneficiary to name a successor. In this case, if your original beneficiary dies, the successor can continue to take the RMD's over the original beneficiary's remaining schedule.
If your IRA doesn't stretch, and you'd like to have these types of options available for your own individual planning, you can transfer your IRA funds to an IRA that has the desired provisions. In addition, your beneficiary also has the same option as long as the IRA remains in your name.
Your spouse can roll over the IRA assets to their own IRA or elect to treat your IRA as their own (if they are the only beneficiary). In this situation, your spouse would not have to start taking distributions until they reach age 70.5.
Sometimes though, you might need to consider taking your planning a step further if you have a beneficiary that is likely to want 'instant gratification'. In this type of situation, it is possible to name a trust as the beneficiary of your IRA so that you can set some controls in place ahead of time.
There is much to consider in the planning of your finances and various accounts. It is very difficult for you to know it all, or even to know the right questions to ask in situations like this. Therefore, I recommend having a team of knowledgeable professionals, led by a CFP®, to help you.
If this information interests you, raises any questions, or has simply left you thinking about the possible impact a well-planned "stretch" might have on your finances please feel free to contact me and I'll be happy to help you.
The rules governing inherited IRAs and employer-sponsored plan accounts are complex. Consult a tax advisor for more information. Neither Blaine Bowers nor the Strategic Financial Alliance provide tax or legal advice.
Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA), member, FINRA, SIPC, a Registered Investment Advisor, which is otherwise unaffiliated with Bowers Private Wealth Management. Supervising office: 2200 Century Parkway, Suite 500, Atlanta, GA 30345