Friday, June 20, 2014
One of the most powerful estate planning tools is the “stretch IRA,” which is a Traditional IRA or a Roth IRA designated to allow an account owner’s beneficiaries the ability to continue tax-deferred or tax-free growth during one or more generations after the death of the original account holder. Thus, a stretch IRA can have a profound effect for multiple family members if wealth is transferred during the upcoming years.
The first step to building wealth is to determine to whom you want to leave your IRA assets. Your beneficiaries could include your spouse, children, grandchildren, a trust, a friend, a charity or a combination of all these. You must do beneficiary reviews as your wishes might change.
If you designate your spouse as the beneficiary of your Traditional IRA, they have an advantage in that they may choose to roll the remaining account balance over to their own Traditional IRA. This is useful because the spouse has the ability to make additional contributions to the IRA, name their own beneficiaries, and wait until they are 70 ½ before making required minimum distributions. This enables a spouse to take advantage of the tax-deferred growth and not immediately take distributions, which count as ordinary income.
Conversely, a non-spouse beneficiary of a Traditional IRA must take required minimum distributions (RMDs) by Dec. 31 of the year following the death of the original account owner. This is where the “stretch” features come into play. Instead of RMDs being calculated by the original account holder’s age, the RMDs will be based on the beneficiary’s life expectancy factor as defined by the IRS’s “single life expectancy” table. Stretch IRAs have the ability to build a lasting legacy for future generations as well as lessen the effect of ordinary income tax liability for beneficiaries by stretching the RMDs over a longer period of time.
See Joel Harris, What Is A Stretch IRA? Current in Carmel, June 17, 2014.