Stretch Your IRA or 401k for Multiple Generations
(You’ve come this far, don’t drop the ball!)

The “Stretch IRA” is an estate planning strategy that allows you to lower the taxes your beneficiaries will inherit, and that reduces your retirement income in case you don’t think you will need all of your IRA or 401k funds in retirement.

It’s a simple technique that can save your heirs thousands of dollars or more in income and estate taxes.

The Stretch IRA
Helps Your Children AND Grandchildren

 
How does it work? Think of your estate plan as involving three generations. You (and your spouse, if you are married) are the first generation; your children, or other heirs, are the second generation; and their beneficiaries are the third generation. The stretch would occur in the second and third generations.

Here’s how it works: 

If you currently own a 401k, you must first roll it over into an IRA. You just cannot stretch a 401k. 

If you have a 401k and/or multiple IRAs, it may make sense to consolidate into one IRA account.

Now, once you’ve done this, you’re ready to start “stretching” your IRA.

If you are married, after your death, usually the best option is to leave the IRA to your spouse, who then rolls it into his or her own IRA, then names new beneficiaries for the IRA. These new beneficiaries are usually your children. (Hopefully).

When your spouse dies, your children who are the beneficiaries step in to inherit the IRA. This is where the “stretch” begins. Each of your children who is a beneficiary of the IRA splits the IRA into his/her own inherited IRA, and then name his/her own beneficiaries, hopefully their children of course.  

Now that each of your children has their own inherited IRA, they can continue to take the required minimum distributions based on their OWN ages, not yours or anybody else. And, they are not forced to take out in a lump sum basis or over a five year period.

When your child dies, his/her beneficiaries then steps in to inherit the IRA one more time. And, again, they can continue to take the required minimum distributions based on their OWN ages. And, they are not forced to take it out in a lump sum or over a period of time.

If you are not married, your beneficiary has two options:

1. Take the entire amount out of the IRA by the end of the fifth calendar year after your death.

2. Take distributions over a period of time.

If your death occurs before you start taking distributions, the period of time is based on the beneficiary’s life expectancy.

If your death occurs after you start taking distributions, the time period varies according to what distribution method you were using (whether you were recalculating or not recalculating your life expectancy each year.). If you weren’t recalculating, distributions continue on the same schedule they were on before your death. If you were recalculating, the distributions are based on your beneficiary’s life expectancy (with some adjustments). 

The Stretch IRA offers a lifetime distribution, with deferred taxes and tax-deferred growth and stretches the income deriving from the IRA.

If you’re taking or planning to take only the Required Minimum Distributions, the Stretch IRA can be a valuable tool to provide lifetime income for your spouse, your children and grandchildren.

Stretch IRAs allow your beneficiary to name his or her own beneficiary upon your death, with the longest allowable period of tax-deferral before all the assets in the IRA must be distributed.

To stretch an IRA properly, the following guidelines must be followed:

1. The names of the IRA owner and the beneficiary must be on the IRA account.

2. The custodian holding the IRA must allow for the stretch

3. The IRA payout must begin no later than December 31^st after the death of the IRA owner.

If these simple steps are not followed, the IRA will be subject to taxes, and the beneficiary will not be able to stretch the IRA over his/her lifetime.

The concept may sound easy, but implementation can be difficult. Be sure to work with a competent financial advisor who can help you maneuver through the “stretching” process to make sure you get the rules to work in your favor.

Find out how the Stretch IRA can benefit you, your spouse, children and grandchildren, give us a call (810) 714-9021 or click here and an Advisor will contact you.