WHAT IS A STRETCH continued
What Is a “Stretch” IRA?
Provided by Ed Hill Wealth Management
Finding a method to leave a lasting legacy
to your loved ones without increasing their tax
burdens can be difficult and complicated. A
“stretch” IRA may be a useful approach that can
benefit your heirs for generations to come.
A stretch IRA is not a special type of IRA but
rather a term frequently used to describe this IRA
strategy, also known as a “multi-generational”
IRA, that can be used to extend the tax-deferred
savings on inherited IRA assets for one or more
generations to benefit future beneficiaries.
Here’s how it works. You let the funds
accumulate in the IRA for as long as possible. You
name as beneficiary someone younger, perhaps
a son or daughter. When you have to start taking
required minimum distributions (RMDs) from
your traditional
IRA after turning
age 70½, you take
only the minimum
annual amount
required by the IRS
each year. (If you fail
to take a minimum
distribution, you
could be subject
to a 50% income
tax penalty on
the amount that
should have been
withdrawn.)
When your
beneficiary inherits
your IRA, he or she
might also have
the ability to take
required minimum distributions (RMDs)
based on his or her life expectancy. (RMDs are
calculated each year and must begin no later
than December 31 of the year following your
death.) In this way, your beneficiary would have
the potential to stretch the distributions over his
or her own lifetime, which enables the funds to
continue compounding tax deferred for a longer
WHAT IS A STRETCH con't. next column
period and avoids a large initial tax bill. Your
beneficiary can also name a beneficiary, who
can potentially stretch the distributions even
longer.
There is a limit to how long you can “stretch”
an IRA. The IRS doesn’t want to postpone taxes
indefinitely. The distribution period cannot
extend beyond the first-generation beneficiary’s
life expectancy. For example, if you designated
your son to be the sole beneficiary of your IRA
and he was 40 when you died (and you hadn’t yet
reached the age for taking RMDs), he could take
RMDs based on his 37.6-year life expectancy,
starting the year after you died. If he died 20
years later, his designated beneficiary could
continue taking minimum distributions based
on what would have been your son’s remaining
life expectancy (20.8 years).
Of course, non-spouse beneficiaries of IRAs
face some hurdles. There are different sets of
rules to determine the RMDs that a non-spouse
beneficiary must receive. They depend on
whether the original account owner died before,
on, or after reaching the required beginning
date for RMDs. Not only are these rules complex,
but they can have far-reaching implications.
Spousal beneficiaries of IRAs have more options
than non-spouse beneficiaries.
If you have a desire to extend your financial
legacy over future generations and don’t need
the IRA assets for income during your lifetime,
then this strategy may be appropriate for you.
Because many tax and distribution rules must
be followed, make sure to seek legal or tax
counsel before making any final decisions.
Note: Make sure the provisions in your IRA
allow beneficiaries to take distributions over
their lifetimes and to name second-generation
beneficiaries. Distributions from traditional
IRAs are taxed as ordinary income. Distributions
prior to age 59½ are subject to a 10% federal
income tax penalty (this rule does not apply
to IRA beneficiaries, who must begin taking
minimum distributions no later than December
31 of the year following the original owner’s
death). Beneficiaries also have the flexibility to
take out more than the minimum distribution at
any time. ☐ For more info see ad p.37.
Edward Hill Wealth Management, LLC
West End • Office: (910) 466-9140
In this
way, your
beneficiary
would have
the potential
to stretch the
distributions
over his or
her own
lifetime...
Laughter is the sun that drives winter
from the human face. ~ Victor Hugo
No. 137 The Pinehurst Gazette, Inc. p.7