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Stretching Wealth With a Stretch IRA |
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A stretch IRA is a traditional IRA that passes from the account owner to one or more younger beneficiaries at the time of the account owner's death. Since the younger beneficiary has a longer life expectancy than the original IRA owner, he or she can "stretch" the life of the IRA by receiving smaller required minimum distributions (RMDs) each year over his or her life span. More money can then remain in the IRA with the potential for continued tax-deferred growth.
Employing the stretch technique by naming a younger beneficiary (such as a child or grandchild) could provide significant long-term benefits. Although the estate tax has been rescinded for the 2010 tax year, according to current law, it is scheduled to reappear in 2011. If the value of the IRA at the time of your death causes the value of your estate to exceed the lifetime estate tax exclusion at the time, the amount in excess will be taxable at then-current rates. Although it is difficult to predict what estate tax laws will be in future years, according to current law, in 2011, a federal estate tax exemption of $1 million is scheduled to reappear, with a maximum federal estate tax rate of 50%.
Creating a stretch IRA has no effect on the account owner's RMD requirements, which continue to be based on his or her life expectancy. Once the account owner dies, however, beneficiaries begin taking RMDs based on their own life expectancies. Whereas the owner of a stretch IRA must begin receiving RMDs after reaching age 70 1/2, beneficiaries of a stretch IRA begin receiving RMDs after the account owner's death. In either scenario, distributions are taxable to the payee at current income tax rates.
Beneficiaries have the right to receive the full value of their inherited IRA assets by the end of the fifth year following the year of the account owner's death. However, by opting to take only the required minimum amount instead, a beneficiary can theoretically stretch the IRA and tax-deferred growth throughout his or her lifetime.
Other key considerations to note:
- New rules allow beneficiaries to be named after the account owner's RMDs have begun, and beneficiary designations can be changed after the account owner's death (although no new beneficiaries can be named at that point).
- The amount of a beneficiary's RMD is based on his or her own life expectancy, even if the original account owner's RMDs had already begun.
Note that the information presented here applies to traditional IRAs bequeathed to a nonspousal beneficiary. Special rules apply to spousal beneficiaries. Contact your financial advisor or tax professional for more information.
©2010 Standard & Poor's Financial Communications. All rights reserved
©2010, Kelly Ruggles, Spokane, WA. Web site
Kelly C. Ruggles, Spokane, WA. is a fee-based financial planner located in Spokane.
Kelly C. Ruggles, Spokane, WA. President of American Reliance Group, Inc., a registered investment advisor.
Kelly Ruggles, Spokane, WA. is the author of "The Financial Playbook" for Retirement
Kelly C. Ruggles, Spokane, WA. Does not intend to provide personalized investment advice through this publication and does not represent the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions
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