What Is a Stretch IRA?

This is an article from the Northern California Center for Estate Planning & Elder Law (http://www.norcalplanners.com/) in Sacramento, California, that we thought others may find helpful.

Estate planning attorneys often help people who want to take things a couple of steps further. You want to craft a suitable legacy to leave behind to your loved ones, but you should also plan ahead for your active retirement years and the twilight years that will follow.

When you think about an individual retirement account or IRA, you probably envision a retirement nest egg, and this is the idea behind these accounts. However, if you do not need the assets in your individual retirement account as a senior citizen, your IRA could provide estate planning benefits.

There are essentially two different types of individual retirement accounts that are widely utilized: traditional IRAs, and Roth IRAs. The matter of taxation is largely the dividing line between the two types of accounts. With a traditional retirement account, you make contributions before you pay taxes on the income. As a result, the withdrawals are subject to regular income taxes.

Things work in the reverse with a Roth individual retirement account. You contribute into the account after you pay taxes on the income, so you are not taxed if you decide to take withdrawals. However, you are not required to take withdrawals at any time if you have a Roth IRA.

With a traditional individual retirement account, you are required to take mandatory minimum distributions at the age of 70.5, because the IRS wants to see some money eventually.

Stretching an IRA

If you never touch the assets in your Roth IRA and you leave the account to a beneficiary who is not your spouse, the beneficiary would be required to take mandatory minimum distributions. However,  the beneficiary could choose to stretch the individual retirement account by taking only the minimum that is required by law.

These distributions would not be taxed, and the tax-free growth would be maximized. This can be a very effective estate planning strategy.

It is also possible for a beneficiary to stretch a traditional individual retirement account, but the benefits are more limited. If you live a normal life span, the assets in the account will be absorbed year-by-year during your life, so the account will gradually dwindle. Plus, the distributions to the beneficiary would be subject to taxation.