A Stretch IRA is an IRA that is set up so the assets can remain in the IRA account after the owner has passed away. The reason you want to do this is so your heirs do not have to pay tax at a higher rate on the IRA. This can happen if the beneficiaries are in their high earning years.\
The basic rule of inheriting an IRA are that the non-spouse beneficiary must either take IRA distributions within five years of the death of the owner or over the life expectancy of the beneficiary. By taking the money out over the life expectancy the money grows inside the IRA tax deferred.
The tax savings of taking the payments over the life expectancy rather than in one year or even five years can be substantial. For example: If you inherit and take a full distribution of an IRA valued at $500,000 and you have earnings and investment income totaling $180,000, you now have total income of $680,000. As you know, income over $450,000 creates several adverse tax problems and is taxed at the highest rates. The solution is to stretch the IRA over the beneficiary’s life time. By doing this, you maintain your income under $250,000, and pay tax at a much lower rate. The IRA continues to grow and, if structured properly, your grandchildren can inherit the IRA and have a stream of income over their lifetime as well.
In order to properly Stretch an IRA, you just need to have the beneficiaries properly named and make sure that your advisors are aware of the Stretch rules. It is important that they advise the beneficiaries of the benefits and very strict rules of Stretching the IRA.
We can help you with this simple strategy along with other estate planning tools that can save your family thousands of dollars and preserve your legacy.
posted by Suzan Ross, CPA/PFS