By Brian Bishop, CFP, CPA, Bishop Financial Advisors, Akron LIVING WELL Magazine
The term “stretch IRA” has become a popular way to refer to an IRA with provisions that make it easier to “stretch out” the time that funds can stay in your IRA after your death. It’s not a special IRA, and there’s nothing dramatic about this “stretch” language. Any IRA can include stretch provisions, but not all do.
Why is “stretching” important?
Earnings in an IRA grow tax deferred. Over time, this tax-deferred growth can help you accumulate significant retirement funds. If you’re able to support yourself in retirement without the need to tap into your IRA, you may want to continue this tax-deferred growth for as long as possible. In fact, you may want your heirs to benefit from this tax-deferred growth as well. But funds can’t stay in your IRA forever. Required minimum distribution (RMD) rules will apply after your death. The goal of a stretch IRA is to make sure your beneficiary can take distributions over the maximum period the RMD rules allow.
Key provision #1
The RMD rules let your beneficiary take distributions from an inherited IRA over a fixed period of time, based on your beneficiary’s life expectancy. As you can see, this rule can keep your IRA funds growing tax-deferred for a very long time. But even though the RMD rules allow your beneficiary to “stretch out” payments over her life expectancy, your particular IRA may not. Make sure your IRA contract lets your beneficiary take payments over her life expectancy.
Key provision #2
But what happens if your beneficiary elects to take distributions over his or her life expectancy but dies a few years later? This is where the IRA language becomes crucial. If the IRA language doesn’t address what happens when your beneficiary dies, then the IRA balance is typically paid to your beneficiary’s estate. However, IRA providers are increasingly allowing an original beneficiary to name a successor beneficiary. In this case, if your original beneficiary dies, the successor beneficiary “steps into the shoes” of your original beneficiary and can continue to take RMDs over the original beneficiary’s remaining distribution schedule.
Contact Brian to discuss your retirement financial plans. He successfully helps his clients live well in retirement with the financial security they have worked for. Brian is the owner of Bishop Financial Advisors. Call 330-342-4080.