Stretch your Retirement account or IRA

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Stretch IRA
 
The "stretch IRA" is a term used to reference the ability under the tax code of a retirement plan beneficiary to spread out distributions from an inherited retirement account over the beneficiary's own life expectancy if set up and executed properly. If not set up and executed properly, the result can be immediate, excessive, and unnecessary taxation.

Setting up for the Stretch IRA requires several planning points to be covered such as:

  • Does the IRA Custodial Document or Retirement Plan Document allow for stretch distributions?
  • Who is named as beneficiary?
  • Is the beneficiary a non-spouse?
  • Are there multiple beneficiaries?
  • Are there any non-person beneficiaries? (i.e. a trust, estate, charity, etc.)
  • Is there a need to force the beneficiaries to stretch the account?
  • Do the beneficiaries know how to implement the stretch properly?
 
Once inherited there are specific rules that must be followed including:
  • Retirement account must be re-titled properly
  • Non-spouse beneficiaries cannot do a rollover. Inherited IRA transfers must be Trustee-to-trustee otherwise the whole account can become taxable. Once money is distributed from an inherited IRA it cannot be put back!
  • Required Minimum Distributions (RMDs) are calculated using the beneficiary's own life expectancy and must begin by December 31st of the year following the year of death unless and exception applies.
  • If the IRA owner was already taking Required Minimum Distributions and had not yet taken his/her RMD for the year of death, the beneficiary must take this distribution by December 31st of the year of death unless an exception applies. The year of death RMD does not go to the estate.

As long as the rules are properly followed the beneficiary can stretch the distributions over their own life expectancy which can be decades in many cases. This deferral of taxation can allow the inherited account to continue to grow for many years in a tax deferred account. If these rules are not followed the result can be loss of the tax deferral and this cannot be fixed!

Click on the following examples to see how this works:

Stretch IRA for a 1 year-old beneficiary

Stretch IRA for a 50 year-old beneficiary

The above mentioned planning points are only a representation of some of the planning points and should not be used as a substitute for working with a qualified IRA distribution specialist. As an Ed Slott trained Master Elite IRA Advisor, I have the proper education and tools to help IRA owners and beneficiaries avoid unnecessary and excessive taxation so that more of their money goes to themselves and their families rather than Uncle Sam!

Schedule a complimentary Discovery Consultation to learn more about the Stretch IRA.