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The Stretch IRA: A Wealth Preservation Strategy That’s Easy to Use

Posted by Michael J. O'Connor | CWS®, Vice President Investments
May 8, 2014

The Stretch IRA strategy is a method for lengthening the life of your IRA assets, in hopes they span multiple generations. We stress the word “method” because the Stretch IRA is not actually a product – it’s a wealth preservation strategy your beneficiaries can use to stretch the life of the IRA assets they inherit from you.1

We’ll explain how it’s done below, but first we’ll help you understand the benefits.

Stretching Your IRA Can Help It Grow Tax-Deferred Longer

Stretching your IRA can lower the required withdrawal amounts your heirs have to take each year, meaning the value of your IRA can grow tax-deferred longer – a benefit that can keep the IRA in the family for generations.

How the Stretch IRA Strategy Works

Here’s how it works: under the Stretch strategy, the amount of the required minimum distribution (RMDs) becomes based on your beneficiary’s life expectancy instead of your life expectancy (as set by the IRS life expectancy tables).

For example, let’s say your 40-year old daughter inherits your IRA. Assuming you were over the age of 70 ½ when she inherited it, your daughter must continue taking Required Minimum Distributions (RMDs) from that IRA. However, she can Stretch the IRA and use her life expectancy instead of yours to calculate the RMDs.1

Based on the IRS life expectancy tables, her life expectancy is 42.7 years. In year 1 she’ll have to withdraw the value of the IRA divided by 42.7. For every year after that, you subtract life expectancy by 1. In this example in year two she would have to withdraw the value of the IRA divided by 41.7, and so on. She’ll continue reducing the life expectancy number by one each year until the IRA is fully depleted.2

In the event these assets are passed down to your daughter’s beneficiaries, they would continue to take the RMDs in her place. This could be your grandchild, for instance, and in this case your IRA would have spanned multiple generations.

Applying the Stretch IRA to Your Estate Plan in 3 Steps

As we mentioned in the beginning, a Stretch IRA is not a product like a Roth IRA or a 401(k) – it’s a strategy. So there is not any special paperwork or account registrations you need to apply, there are just basically three procedural matters you’ll need to attend to.

1) Check the Stretch IRA Rules With Your Custodian

First things first, you should check with your custodian to make sure they allow the stretch provision on an inherited IRA. Most do.1

2) Make Sure Your Heirs are Aware of the Stretch IRA Benefits

This is where the help of a financial advisor could come in handy. The real key to properly carrying out the Stretch IRA strategy is to have your beneficiaries understand exactly how it works.

If they know they can withdraw money based on their life expectancy instead of yours, and they understand the true value of long-term, tax-deferred growth, then there’s a better chance the IRA can be made to last for a long time. Your, or their, financial advisor can help actually implement the Stretch IRA strategy.

3) IRA Beneficiaries That Are Younger Can Benefit More

Children and grandchildren could be ideal candidates for the Stretch IRA strategy, since they have longer life expectancies (and therefore lower distribution requirements) than older relatives. Since they’d only have to withdraw a lower amount from the IRA in any given year, the IRA would have a better opportunity to grow.

One very important note: be careful if you name your estate as the beneficiary, since your estate has no life expectancy. In that case, your heirs might have to withdraw all the money from the IRA in 5 years, which is essentially the opposite of the stretch strategy.

One of our Wealth Managers can talk you through more of the benefits of the Stretch IRA, and we can discuss how it can be applied to your personal situation. Call us at 1-800-541-7774 to learn more today.

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1 Wells Fargo

2 Investopedia

To the extent this presentation includes any federal tax advice, the presentation is not intended or written by WrapManager, Inc. to be used, and cannot be used, for the purpose of avoiding federal tax penalties. WrapManager, Inc. does not advise on any income tax requirements or issues. Use of any information presented by WrapManager, Inc. is for general information only and does not represent tax advice either express or implied. You are encouraged to seek professional tax advice for income tax questions and assistance. 

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