Demystifying the Stretch IRA

iStock_000066493583_XXXLargeStretch IRAs are useful tools for the individual who wants to extend the life of their retirement accounts through multiple generations. Although there is often confusion surrounding stretch IRAs and how they work, the concept is straightforward. A stretch IRA is a strategy, not a product, used to “stretch” the life of Roth IRA and Traditional IRA assets by designating beneficiaries with the longest life expectancy, such as grandchildren or even great grandchildren. By selecting beneficiaries two to three generations younger than the account owner, as opposed to designating children, the IRS will have lower imposed required minimum distributions (RMDs) for the inherited IRA, leaving a greater asset base to grow and cover future distributions.

To calculate the RMD for an inherited IRA (Table 1 – IRS Single Life Expectancy Table), divide the previous year-end account balance by the divisor (beneficiary’s life expectancy) corresponding to their respective age in the year following the death. This divisor is the IRS’s actuarial-based remaining life expectancy for the beneficiary, so each year, the divisor will decrease by 1, causing an increase in the percent of the account balance taken for the RMD.

The IRS provides a list of distribution options available to inherited IRA owners. Distribution options vary depending on whether the beneficiary was a spouse or non-spouse, and also whether the IRA owner passed away before their required beginning date (RBD), which is April 1 after they turn 70½. (more…)