“Stretching” Your IRA

by: Joshua P. Itzoe, CFP©, AIF®

Did you know that your IRA is an excellent estate planning tool that can be used as a wealth transfer vehicle for your loved ones? In planning for the distribution of IRAs after death, a primary goal should be to maximize income tax deferral through the proper use of beneficiary designation forms. While planning for estate tax minimization and deferral at the same time is a constant balancing act, there are strategies available that can dovetail nicely with your overall estate plan. One such strategy that you should consider is a
“Stretch IRA.”

The Stretch IRA is not a new type of product that you can buy, but rather a strategy that allows your beneficiaries to take mandatory retirement distributions over their own life lifetime. This can result in a minimization of income taxes due and the ability to keep the
money growing tax-deferred for many years and across multiple generations. This strategy works best by named beneficiaries who are younger than the original IRA owner. The younger the beneficiary, the longer the IRA can grow tax-deferred and the greater the
potential impact.

How the Stretch IRA Works

Consider the example of John Smith who will turn 70 ½ this year and has an IRA valued at $1,000,000 and earning a 7% annual return each year. He names his wife Jane, 67, as primary beneficiary on the account and his daughter Jenny, 37, is named as contingent
beneficiary. Due to the pension John receives, he decides to only take the required minimum distributions (RMD) out of his IRA each year to supplement his income. If John dies at age 75 he will have taken a total of $260,105 in annual distributions from the IRA
before income tax. At this point the account is worth $1,194,652 and Jane rolls this money it into her own IRA and names Jenny the primary beneficiary. Jane also only takes annual RMDs until her death at age 82 and receives a total of $650,275 in RMD income.
Upon Jane’s death the account is valued at $1,457,686 and Jenny, now age 53, inherits the IRA (leaving it in her mother’s name) and begins taking only the minimum distributions based on her own life expectancy of 31.4 years (according to IRS tables). If she continues to do this and the account earns 7% each year, Jenny will be able to withdraw roughly $5,440,981 over her lifetime from this account!

A Word of Caution

While it may sound easy to “stretch” your IRA, implementing this strategy is often very difficult because of the complexities that exist within the tax code regarding retirement plan distributions. There is a labyrinth of rules and regulations that must be properly
understood and followed or the IRA owner could be subject to substantial and often irreversible penalties. Because of the complexities involved it is critical to have competent and knowledgeable advisors set up and monitor these strategies for you.

One last note

It is important to evaluate this strategy and how it affects your overall estate and financial plan before making any changes. Feel free to contact Greenspring Wealth Management to learn more about this and other advanced retirement planning strategies.

The information in this article is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, and does not purport to be complete and is not intended as the primary basis for financial planning or investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor.