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What is the definition of a Stretch IRA? A Stretch IRA is an effective wealth transfer tool that enables you to pass on IRA assets to a younger beneficiary, usually your children or grandchildren. If the beneficiary is under age 59 1/2 the premature 10% penalty is avoided because payments to the beneficiaries are treated as death distributions. In 2002 the IRS issued regulations that enable a person that has a traditional IRA to change the beneficiary to stretch IRA distributions. Under the new regulations, when you stretch the IRA distribution you are effectively stretching out the length of time withdrawals can be taken from the IRA. The length of time is usually based upon the life expectancy of the younger beneficiary. This obviously extends the period of tax deferred earnings beyond the age of the individual that initially set up the IRA. When you adopt a stretch IRA strategy for wealth transfer you still maintain control over your IRA assets. A stretch IRA is revocable, meaning that you can at anytime change your beneficiaries. You can even change the amount of your distributions from the IRA. When you reach 70 1/2 you are required to make required minimum distributions from an IRA. Any changes that you could make to the beneficiary do not effect this amount. Stretch IRA Benefits Maintain control over retirement assets with the ability to pass them on to future generations. Tax efficient strategy for wealth transfer - Transfers avoid the 10% penalty tax and earnings within the IRA grow on a tax deferred basis. Wealth accumulation - IRA assets continue to grow for the benefit of future generations. Beneficiaries of this strategy are taking payments based upon their life expectancy. Principal still compounds during the period of withdrawals by the beneficiary. Stretch IRA Investor Considerations The principal will be left in tact for the benefit of the beneficiaries. If the IRA assets must be used extensively by the owner not mush may be left for the benefit of the beneficiaries. Stretch IRAs assume that the owner of the IRA has other assets that they may use for retirement and will only take the required minimum distributions from the IRA. The rate of return for the Stretch IRA has to be competitive and consistent over time providing a nest egg for future generations. The lower the return of the investment the sooner the underlying assets of the IRA will be depleted. Evaluate all retirement income sources taking under consideration, inflation, medical care and other necessary lifetime needs in creating the Stretch IRA. Consider investment opportunities that may include a guarantee of principal. Investments that provide the greatest return usually also carry the greatest risk.
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