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Retirement Planning
Home›Retirement Planning›A New Look at Stretch IRAs

A New Look at Stretch IRAs

By WiserAdvisor Insights
December 10, 2019
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An IRA – or an Independent Retirement Account – is an assuring way to save money through tax-deferred earnings. Depending on the plan you chose, an IRA can help you get a step closer to your intended savings strategy for retirement. 

Out of the many ways in which IRAs help us save money, the most popular one is through estate planning. When you stretch an IRA to a non-spouse beneficiary, the tax-free growth continues for a longer time. This process is as also referred to as stretch IRAs. In simple words, it is a strategy to acquire extended life on an IRA for the heirs of the annuitant. Let us get to know more about this valuable process and its key benefits for retirees. 

Rules concerning Stretch IRAs 

When you opt to transfer your estate wealth using a stretch IRA, you need to be aware of the rule governing its inheritance. The guidelines generally depend on the type of beneficiary and the age of the annuitant at the time of their demise. The spouse of the owner of the IRA usually has more benefits than other beneficiaries. 

The beneficiary might also have a variety of choices to look forward to, if they are not mandated by required minimum distributions for withdrawing money from the IRA. Some of these rules include:

  • If the owner does not withdraw the IRA account distribution, the heir can maintain the money for a period of 5 years after the demise of the owner. 
  • Special life expectancy is defined by the IRS tables. These numbers contribute towards the minimal amount of money to be withdrawn by a beneficiary.
  • A beneficiary can acquire the entire balance in the IRA account.
  • The spouse of the owner of an IRA has the power to transfer the account into their own account. In such a case, the spouse is treated as the permanent owner of the account. Such accounts also abide by all of the rules mentioned above.

Stretching an IRA the ideal way

The most preferred way to stretch your IRA is to name your spouse the primary beneficiary of your account. This allows them to take over the savings and transfer them into their account when you may no longer be with the family. A spouse can extract the maximum benefits from a stretch IRA. They can either take required minimum distributions as per their life expectancy or delay it till they reach the age of 70. After them, their heirs can take over the distribution and transfer the inherited benefits to the next generation. One may even opt for nominating a younger non-spouse beneficiary who can take over the distributions of the IRA. 

Taxes surrounding Stretch IRAs 

The inheritors of the stretch IRA are eligible to get a reduction in their income tax. The deduction accounts for the estate tax paid through the inherited IRA account. But there is a catch here. The amount you get from the IRA account is taxable, but since the owner of the account is liable to pay a federal estate tax anyway, the deductions will be accounted for.   

Observing the recent trends in estate taxes, the exclusion amount is on a rise. In 2019, properties with a value of more than $11.4 million were subjected to tax. These numbers are considerably high as compared to the estimates in 2018, that stood at $11.18 million. 

Legal Documentation for Stretch IRAs

Stretching an IRA needs immaculate ID proofs of the beneficiary, along with other government documents. If this step is not taken seriously, the account shifts to the estate. In such a scenario, the beneficiary will have to struggle through the complicated 5-year-rule for determining distributions from the account. 

One important aspect of documentation is the form filling. A misleading or erroneous form can lead to many disasters. It is remarkable to know that the beneficiary form is simple, yet so important that it can lead to the loss of millions of dollars. IRA issues are long-lasting and do not get resolved so smoothly. Hence, one should fill the forms and deposit documents after double-checking all the liabilities. Giving time and attention to the entire process of documentation, can help you avoid all sorts of legal predicaments later. 

Pros and Cons of Stretch IRAs

A stretch IRA can be beneficial for many reasons. Firstly, you can ensure financial safety for the next generation. It is also backed by benefits of lower tax payments, thanks to the small distributions made across a long tenure. Elongating the tax-free income provides an increased time frame for your assets to flourish. This further results in increased tax-free amounts for beneficiaries. 

Stretch IRAs do have some shortcomings too. A major issue is that the strategy is vulnerable to any change in laws and regulations. In rare cases, if the beneficiary is not an adult, the owner needs to look for a guardian and set up a specific guardianship account, which demands more time and energy. 

To sum it up 

If you own significant assets in your IRA, stretching it in a wise manner is an option worth considering. The process does not only protect your financial investments but also keeps the legacy of your family intact. Furthermore, you can also choose the option of stretching the IRA to a trust which can include your spouse. This will help prevent IRA overspending and any unwise decisions made by the beneficiaries in the future. 

If you are confused about the best way to stretch your IRA, help is not far away. Financial advisors can assist you with guidance that can provide decades of growth and income to your heirs.

Tags#financial advisor#IRARetirementRetirement Accountretirement planningStretch IRA
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