Stretch IRA Rules

A Stretch IRA is not another special type of Individual Retirement Account. In fact, this is an approach to estate planning, which goal is to maximize the tax-deferred growth potential of the IRA assets by leaving them in the account for as long as the account holder and beneficiaries want and as long as the law permits. The approach being used for the stretch IRA does not allow large or lump-sum distributions to the IRA owner and his beneficiaries. Usually, these distributions of IRA assets are spread out to one or two later generations of beneficiaries.

Thus, a stretch IRA, or also known as “inherited IRA”, is simply a wealth transfer method that provides potential to the IRA holder to “stretch” his IRA over several future generations, so the obvious advantage of this is that taxes may also be spread out. Of course, just as the Individual Retirement Account is governed by several IRA rules and regulations, there are some Stretch IRA rules that must also be considered and followed for this type of approach.

Stretching Your IRA

IRAs pass the contract or beneficiary designation upon death of the owner. It is very obvious and typical that most IRA owners name their spouses as the primary IRA beneficiaries, and their children as the contingent beneficiaries.

This strategy might just require the spouse to take more taxable income from the IRA than what the account holder’s spouse really needs after the IRA will be inherited. Therefore, it would be wiser to name other beneficiaries of later generations, such as grandchildren or great-grandchildren, especially if income needs are not an issue for the spouse and the children of the IRA owner.

This method allows the IRA holder to stretch the value of the IRA out over the next generations.

Stretch IRA Rules

The Stretch IRA must also be in accordance with the rules and regulations depending on the type of the IRA plan. If a person inherited a Roth IRA, then certain Roth IRA rules must apply. If it’s a Traditional IRA that a person wants to convert to Roth, obviously, this must be in accordance with IRA conversion rules as well. Moreover, if this IRA is either SEP or SIMPLE IRAs, then the SEP and SIMPLE IRA rules must also be followed. Even though they are almost the same, there are some SEP IRA rules that are totally different from the those of SIMPLE IRA. Likewise, if the account is rolled over from another investment vehicle such as a 401k account, then the necessary IRA rollover rules must also be considered and followed.

If a person is an IRA beneficiary who opts to open a Stretch IRA, the Internal Revenue Services (IRS) limits this individual’s benefits because he is prohibited to make contributions and he is required to begin taking required minimum distributions the year after the original IRA owner’s death. But the advantage is that even though the IRA beneficiary must take distributions and cannot make contributions to a stretch IRA, he is still allowed to continue directing the account’s assets in any way that he wants. Therefore, if the assets continue to grow, then he will be able to benefit from the Stretch IRA for many years.

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The information provided on this website does not constitute professional financial advice. We do our best to maintain current & accurate information, but some information may have changed since it was published. Please consult your tax or legal advisor(s) for questions & advice concerning your personal financial situation.
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