The Stretch IRA

Protect Your IRA from the IRS

Every person with an IRA, 401-K or other tax-qualified plan should consider the Stretch IRA - - (for purposes of this article, all tax-qualified retirement plans (QRPs) will be referred to as "IRAs"). This technique is new and offers substantial benefits to clients and their families.

What is a Stretch IRA? 

The Stretch IRA is a tool for providing financial support to future generations by extending any type of tax-qualified retirement plan into another generation. A provision in the tax code allows your children or grandchildren to inherit your IRA while they keep the assets growing in a tax deferred account!   

Is the Stretch IRA a new type of IRA? 

No, the Stretch IRA is a financial planning strategy that takes advantage of Internal Revenue Code provisions. The Stretch IRA is NOT a different type of product, but rather a planning strategy that allows clients to pass on their IRAs to their heirs, allowing the heirs to take distributions throughout their lifetimes. It allows you to leave your IRA to your heirs instead of the IRS.

Many Investment Advisers say that an IRA is a terrible vehicle to die with; is this true? 

Many investment advisers use "traditional planning," which teaches that an IRA is a great vehicle for accumulating assets, that contributions are tax deductible in some cases, and that money grows on a tax-deferred basis during the accumulation period--all of which is true.

However, traditional planners also say that an IRA is a terrible vehicle to die with because the IRA is subject to estate taxes and, if a lump sum distribution is made, it is also subject to income taxes. It is very possible that an IRA upon death could shrink by 80% or more due to taxes, leaving 20% or less to the beneficiary. Certainly if the planning is done in the traditional manner, that statement is true. However, by implementing the Stretch IRA technique, we can pass that IRA down to children or grandchildren, and continue to defer taxes on principal appreciation in the IRA for the life expectancy of the next generation or even longer. If properly designed, IRAs can become an excellent vehicle to pass wealth to the next generation.

Essentially, Stretch planning allows clients to pass on their IRAs to their heirs, to extend the tax-deferred benefits of these accounts beyond their own lifetime, and to offer financial support to their heirs for their lifetimes.

Is naming a trust as beneficiary a good idea? 

Yes, but only if your trust is set up by someone who is skilled in Stretch IRA planning. First of all, you must make sure the trust qualifies as a designated beneficiary trust. There are certain requirements that must be met in order for the trust to qualify. Naming a special type of trust as beneficiary to your IRA offers maximum control over its distributions after you are gone.  In fact, if you do not name a trust as the beneficiary of your IRA, the odds are that the Stretch IRA technique will not work, simply because most beneficiaries take all of the money out very quickly after your death.  This will not give it a chance to grow tax-deferred during their lifetime.  The tremendous investment power of the Stretch IRA is achieved by allowing the account to grow tax-deferred over your beneficiary’s lifetime.  This does not work if the beneficiary takes all the money out early.  A trust can require that the money grow tax-deferred, and allow the beneficiary to withdraw a certain amount each year, thus insuring that the Stretch IRA technique will work.  Should you choose to, you can determine the amount of money (above and beyond the minimum) to come out of your IRA to any or all of your beneficiaries.

What about naming a Charity? 

If you are planning to leave an asset to a charity after you die, a tax-deferred account may be an excellent choice, since the charity does not incur income taxes when it receives the account. Furthermore, the asset will not be included in your taxable estate, which reduces your overall estate tax bill. However, you should create a separate account for the charity if it is not the only beneficiary. If not separated, leaving a charity as a beneficiary could spoil the stretch planning for the other beneficiaries.

How does the ROTH IRA come into play? 

For those who have a ROTH IRA, minimum distributions are not required until after death, at which time the usual rules and regulations previously discussed go into effect. Then distributions can continue over the life expectancies of properly structured beneficiaries, all income tax-free! This offers tremendous planning opportunities when combined with Stretch rules.

Do I have to give my IRA away during my life? 

No. You merely set up the proper planning so that, after your death, you can stretch your IRA and defer taxes for as long as possible. The greatest thing about Stretch planning is that you remain in complete control during your lifetime. You may withdraw everything out of your IRA if you choose, or change your beneficiaries or even donate it to charity.

Click the following articles for more information:

    - The IRA Inheritance Trust
    - Multigenerational Trust Planning With Qualified Retirement Plans

Pursuant to U.S. Treasury Department Regulations, we are now required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including attachments and enclosures, is not intended or written to be used, and may not be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matters addressed herein.

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