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…)

‘Tis the season for RMDs

Another year flew by and the holidays are already here. Snowflakes are falling, houses are decorated, and families are reunited! In the midst of all the joy, it’s easy to put your finances aside. However, if you will be over 70.5 years old by the end of the year, we want to remind you that it’s time to take a Required Minimum Distribution (RMD) from your IRA or retirement account. An RMD is designed to ensure that you withdraw at least a portion of the funds in your account over your lifetime – and that you pay taxes on those funds. Taking your RMD is important because the stakes are high! Failure to withdraw the required minimum will result in a hefty penalty: The amount that was not withdrawn is taxed at 50%. In other words, if the RMD on your traditional IRA is $8,000 in 2013, but you only withdraw $3,000 during 2013, you will be subject to an excise tax of $2,500 (50% of the amount by which the RMD exceeds your actual distribution). It’s quick and easy to arrange your RMD by calling your financial advisor. We recommend you do so by December 15th to ensure plenty of time for the distribution to occur before the end of the year. The sooner you get it done, the more time (and money!) you will have to spend with the ones you love.

Charitable IRA distributions renewed for 2013

We have great news for people making charitable gifts this year! Thanks to the American Taxpayer Relief Act of 2012 (ATRA), IRA owners can once again make a qualified charitable distribution (QCD) from an IRA to a qualified charity of their choice.

For those who are charitably inclined, a QCD can really maximize the effectiveness of charitable gifts.

Here’s how it works:

For this year, IRA owners who are 70 ½ or older and would otherwise have to satisfy a required minimum distribution from an IRA may donate any portion up to $100,000 of the required distribution directly to a qualified charity(ies). Additionally, the IRA owner can exclude the amount of the QCD from his or her gross income on their 2013 tax return. The amount of the QCD excluded from the gross income is not included when determining any deductions made to qualified charitable organizations.

As with many IRS provisions there are a number of fine print items to keep in mind.

  • You are only eligible to make a QCD if you are 70-½ or older.
  • Contributions can only be made to 501(c)(3) charities and 170(b)(1)(A) organizations.
  • Donor advised funds and 30% public foundations are not eligible to receive the QCDs.
  • The QCD must be made directly from your IRA to the desired charity, meaning that the check issued from your IRA must be payable to the charity. If the check is made payable to you, then it counts as taxable income and will be considered a normal IRA distribution.
  • The QCD can be made from any IRA. SEP and SIMPLE IRAs are only eligible if they are not receiving employer contributions in the same year as the QCD is made. You cannot make the QCD from any employer retirement plans, such as a 401(k), 457 or 403(b), etc.
  • The QCD cannot be a split-interest gift, meaning that 100% of the gift must go to a single charity and the gift cannot be shared with the donor or any other designee of the donor. The donor cannot receive any economic benefit as part of the gift.

At this time, the QCD provision is only extended through the end of 2013. We do not know if the provision will be renewed in years beyond. If you are interested in making a donation directly from your IRA to a charity, reach out to your advisor to get started and make 2013 a year of giving!

What is a Required Minimum Distribution (RMD)?

The RMD is the amount that Traditional, SEP, SIMPLE IRA owners and qualified plan participants must begin distributing from their retirement accounts in the year in which they reach 70.5.  The RMD must then be distributed each subsequent year.

The standard deadline for taking your RMD is December 31st.  However, you can use a one time exemption for your first RMD and delay until April 1st of the following year.  If you choose to utilize this deferral you will have to take both your first and second year distributions that year.

The amount of your RMD is calculated by dividing the year end value of all of your IRAs by your distribution factor.  Your distribution factor can be found using the IRA Uniform Lifetime Tables which are prepared by the IRS.