How to ‘Stretch’ Your IRA
by Sidney J. Ruth, CPA/Financial Advisor

Here’s a great way to give a gift that keeps on giving — the “Stretch IRA.” Taxpayers who are in the enviable position of not being financially dependent upon their retirement nest egg are continually searching for ways to defer retirement distributions and related taxes. Now, there is a vehicle to structure your Individual Retirement Account (IRA) to minimize taxes and greatly benefit your heirs.

What is a Stretch IRA?
The term “Stretch IRA” refers to a wealth transfer strategy that seeks to extend the period during which the assets in your IRA continue to grow tax-deferred.

To begin, an IRA owner names a spouse or another (usually younger) person as the account beneficiary. Then, only the legally required minimum distributions, (RMDs), are taken from the account each year. With a traditional IRA, when the primary beneficiary dies, the remaining balance is distributed, creating a sizeable tax bill.

However, the Stretch IRA allows you to name a contingent beneficiary. When the primary beneficiary passes away, the distributions can continue based on the primary beneficiary’s life expectancy. For example: Mary passes away leaving her IRA to her 45-year-old son, John. The balance will be distributed over his life expectancy of 39 years. Mary also names John’s son, Rich, as a contingent beneficiary. In the event of John’s premature death, the distributions would be paid to Rich over John’s life expectancy as though he had never passed away.

Determine if the Stretch IRA is right for you
The Stretch IRA is a strategy designed to maximize your IRA’s tax deferral during your lifetime and help leave a legacy for your heirs. Keep in mind, the Stretch IRA is not suitable for every investor. It is designed for account owners whose primary goal is to leave assets to their heirs because they have sources of income other than their IRA to fund their retirement expenses.

Also, not all IRA providers allow for your retirement assets to be stretched. You should be sure your IRA agreement provides for post-death distributions based on the life expectancy of your beneficiary, and determine whether your beneficiary is able to name his or her own beneficiary.

A good time to look into the Stretch IRA option is during your annual review of the beneficiaries listed on your retirement assets. Call or stop by our office to determine if the stretch strategy makes sense for you.

FIFS Connection, Summer 2005, Vol.2, No.3