If you don't plan on using the fundsyou've accumulated in your IRA, thenyou'll need to determine the mostefficient way of leaving the money toyour heirs. For many, transferring wealthwith a stretch IRA is an ideal solution.
A stretch IRA is not a specialized product,but rather a traditional IRA or RothIRA that has language written into itsdocumentation allowing for continuedtax-deferred growth and distribution ofIRA assets to primary and perhaps evensecondary beneficiaries over a longerperiod of time. Without the presence ofstretch language, assets remaining in anIRA may have to be distributed on amore aggressive basis upon the death ofthe IRA owner. The stretch IRA conceptcan be especially valuable to nonspousalbeneficiaries who do not have the sameownership rights to IRA assets as dospousal beneficiaries.
Although the phrase "stretch IRA"hascaught on, financial institutions offer IRAswith similar provisions under a variety ofnames, including legacy IRAs, multigenerationalIRAs, and perpetual IRAs. Keep inmind that even when different financialinstitutions use the same terminology, theycan mean slightly different things, so youneed to look closely at the fine print.
Using a stretch IRA strategy has no effecton the account owner's required minimumdistribution (RMD), which continues to bebased on their life expectancy. However,once the account owner dies, the primarynonspousal beneficiary may begin takingRMDs based on their own life expectancy.The ability of beneficiaries to extend thelife of the IRA in this fashion means that themoney you accumulate in your IRA andleave to heirs has the potential to lastlonger and produce more wealth foryounger generations.
Assume that you leave a $100,000 IRA toa 5-year-old beneficiary who has an estimatedlife expectancy of 77.7 years. If theaccount earned a hypothetical 8% averageannual rate of return, its value could growto $1.67 million by their 55th birthday. Andthat amount is on top of the nearly$790,000 in taxable RMDs withdrawn fromthe account during the 50-year time period.The efficiency of the stretch IRA assumesthat you take the smallest amount ofmoney at the latest time allowed, that taxlaws don't change, and that there is noinflation and returns don't vary.
The IRS also has relaxed provisions forwhen beneficiaries can be named and/orchanged. For instance, the ability to namenew beneficiaries after RMDs have begunmeans that you could include a child in yourstretch IRA strategy. Similarly, the ability tochange beneficiary designations after theaccount owner's death means that onebeneficiary may choose to disclaim theirown beneficiary status to allow assets topass to a secondary beneficiary.
If more than one beneficiary inherits anIRA, distributions can be based on the lifeexpectancy of the oldest beneficiary, or theIRA can be divided into separate accounts,allowing each to use their own lifeexpectancy for taking distributions.
While it's true that regulatory changeshave made it much easier to incorporate astretch IRA into your financial planning initiatives,it's always a good idea to speakwith a financial professional before implementingany new strategy.
Scott J. Kleiman is the president of Apollonia Financial Services in
Elkins Park, Pa. All securities offered through Linsco/Private
Ledger, member SIPC. Past performance is no guarantee of future
results. The information presented is the opinion of the author and not Linsco/Private Ledger. Mr. Kleiman welcomes questions or comments at 800-242-1760 or email@example.com. This article is not intended to provide specific advice or recommendations
for any individual. Consult with your financial advisor if you have questions.