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Understanding the Stretch IRA

TRI 7.28.16

IRAs are usually opened with the intention of saving enough money to create a stable, dependable

postretirement income. But for some, the assets within an IRA aren’t needed for retirement and instead

are simply passed on to the next generation after the account holder’s death. But what if you want your

IRA assets to go further than that? What if you want them to benefit multiple generations of your

family? In that case, you need to consider a stretch IRA.

What Is a Stretch IRA?

A stretch IRA is simply a strategy that allows an IRA balance to last for generations after the death of the

account holder. The IRS requires Traditional IRA account holders to start taking annual distributions

(called RMDs) at age 70.5. The amount of the RMD is based on the account balance and the age of the

owner. When the owner passes away, the beneficiary who inherits the IRA will have to take distributions

based on their life expectancy starting as soon as the original account holder (now deceased) would

have been 70.5. Depending on the age of the beneficiary, this can lead to the IRA assets being depleted

pretty quickly. When you decide to stretch your IRA, you name the youngest generation—such as

grandchildren or great grandchildren—as the beneficiaries of your IRA. Because their life expectancy will

be far greater than that of your children, this will help the IRA funds stretch and benefit multiple

generations of loved ones.

Stretch IRAs: It’s Not Entirely Up to You

In an ideal world, every stretch IRA would have a beneficiary that complied with the strategy and took

out nothing more than the minimal RMD at the required start date. This, however, is not an ideal world.

There is no way for you to force your beneficiaries to adhere to the stretch strategy, and there is every

possibility that they will simply take a single lump-sum distribution from the account once it’s inherited.

That’s why it’s a good idea to discuss with your heirs the pros and cons of each type of distribution and

how a stretch IRA will ultimately benefit them.

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