What is a Stretch IRA and Why Would I Use it in Estate Planning?

Do you know what a “Stretch IRA” is?

A stretch IRA is a term given to an Individual Retirement Account whereby a person of a later generation is named as the beneficiary. While a spouse or a child could be named as the beneficiary, a stretch IRA normally means that a grandchild, rather than the spouse or a child, is named as the beneficiary.

Usually, distributions from the assets are paid out to beneficiaries of one or two later generations. The income tax on the distribution is deferred until the proceeds are paid out.

To help better inform you about stretch IRAs, let us share with you a few ways in which a stretch IRA may be used in your estate plan.

First, how is a stretch IRA designed? An owner of an IRA initiates the concept by designating the beneficiary to be someone that is expected to outlive the present owner. The beneficiary may likewise name a person of a later generation to inherit the IRA when he or she dies. The general idea is that much of the undistributed funds will continue to grow tax-deferred for as long as possible. Due to the long life-expectancy of the grandchild-beneficiary, we can expect that the IRA will not completely pay out over a child or spouse’s life expectancy.

You may have heard about the recent passage of the Setting Every Community Up For Retirement Act, or the SECURE Act of 2019, by the U.S. House of Representatives. Among other things, the SECURE Act would remove the prohibition on traditional IRA contributions for those age 70 ½ and would increase the age when required minimum distributions must begin from age 70 ½ to age 72. When the account holder passes away, however, the SECURE Act would require non-spouse beneficiaries to withdraw all the money from the IRA within 10 years of this account owner’s death. The U.S. Senate is expected to vote on the SECURE Act this fall, and could have significant implications for existing stretch IRAs.

We know this can be a complicated topic to understand. There is, however, no time like the present to start planning for your future. When you are ready, do not wait to contact our firm and schedule a meeting to discuss your needs.