Stretch IRA

A Stretch IRA is an Individual Retirement Account (IRA) structured to extend the period of tax-deferred earnings beyond the lifetime of the original account holder, potentially benefiting multiple generations.
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Definition

A Stretch IRA is an Individual Retirement Account (IRA) designed to extend the period of tax-deferred earnings after the original account holder’s death. This type of IRA allows for the naming of multiple beneficiaries, who can stretch the disbursement period over their own life expectancies, thereby prolonging the tax-deferred growth of the funds.

Examples

  1. Example 1: Parent to Child
    A 70-year-old individual has an IRA and names their 40-year-old child as the beneficiary. When the parent passes away, the child inherits the IRA and can take Required Minimum Distributions (RMDs) over their own life expectancy, thus extending the period of tax-deferral.

  2. Example 2: Grandparent to Grandchild
    A grandparent names their 10-year-old grandchild as the beneficiary of their IRA. Upon the grandparent’s death, the grandchild inherits the IRA, and the distributions are stretched over the grandchild’s long life expectancy, maximizing the compounding effect of tax-deferred earnings.

Frequently Asked Questions

1. Can a Stretch IRA still be established under the SECURE Act of 2019?
Under the SECURE Act, the Stretch IRA has been largely eliminated for non-spousal beneficiaries who must now withdraw the entire balance within 10 years of the original account holder’s death unless they qualify as eligible designated beneficiaries (EDBs).

2. Who qualifies as an eligible designated beneficiary (EDB)?
EDBs include the surviving spouse, minor children (until they reach the age of majority), disabled or chronically ill individuals, and anyone not more than 10 years younger than the decedent.

3. How does a Stretch IRA benefit the account holder’s beneficiaries?
Beneficiaries can potentially experience significant tax savings and continued growth of the inheritance due to the power of compounded tax-deferred earnings over a longer time frame.

4. Are there any special considerations for trusts as IRA beneficiaries?
Yes, trusts can potentially still use the stretch strategy under certain circumstances, but the terms of the trust must comply with IRS rules to avoid adverse tax results.

  • Individual Retirement Account (IRA): A tax-advantaged account that individuals can use to save and invest for retirement.
  • Required Minimum Distribution (RMD): The minimum amount that must be withdrawn annually from a retirement account, starting at age 72.
  • Eligible Designated Beneficiary (EDB): Certain individuals who can still stretch IRA distributions over their lifetimes, as defined by the SECURE Act.
  • SECURE Act: Legislation enacted in December 2019 that made significant changes to retirement plan rules.

Online References

Suggested Books for Further Studies

  1. The New Retirement Savings Time Bomb: How to Take Financial Control, Avoid Unnecessary Taxes, and Combat the Latest Threats to Your Retirement Savings by Ed Slott
  2. Retirement Planning Guidebook: Navigating the Important Decisions for Retirement Success by Wade D. Pfau
  3. IRA: Federal Tax Rules & Guidelines for Individuals and Financial Institutions by CCH Tax Law Editors

Fundamentals of Stretch IRA: Retirement Planning Basics Quiz

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