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February 16, 2009

Stretch IRA

Your Guide

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(The term Stretch IRA® is copyrighted by Wealth Advisory Group. Used with Permission)

Definition

Also referred to as “Extended IRA’, or Multi-Generational IRA

.

Term used to  refer to an IRA that allows the first-generation beneficiary to designate a successor  beneficiary( or successor beneficiaries) of an inherited IRA, and for the IRA to be passed on to a succession of beneficiaries over the life expectancy of the first-generation beneficiary.

Extended/stretch IRA is not a product, but is instead a provision that typically allows the IRA assets to be passed on to more than one generation of beneficiaries.   Under a stretch or extended IRA, distributions cannot continue for a period that is longer than the life expectancy that applies to the first generation beneficiary . The life expectancy of the successor beneficiary (ies) cannot be taken into consideration.

Example:
35 year-old John inherited a Traditional IRA from his uncle who died before the required beginning date(RBD).

John elected to distribute the IRA balance over his life expectancy, which is determined in  the year following the year his uncle died . John’s life expectancy is 47.5, which corresponds to age 36.  This means that John can stretch distributions from the IRA over a period of 47.5 years.

As permitted by the terms of the IRA agreement, John named his wife as the successor beneficiary of the inherited IRA. If John dies at age 40, his wife is permitted to continue stretching distributions  over his remaining life expectancy of 43.5 years.

If John’s wife designates a beneficiary for the IRA that she inherited from John, and she dies before John’s remaining life expectancy period expires, her beneficiary is permitted to continue distributions over John’s life-expectancy period that remains in the year of her ( John’s wife) death.

The terms of the IRA agreement will determine whether the stretch/extended option is available.

Referring Cite

IRC § 401(a)(9), IRA agreement

Additional Helpful Information

  • The extended/stretch IRA is a tax and estate planning strategy that is used to continue accumulating earnings on a tax-deferred basis  ( or tax-free in the case of a Roth IRA) over the life-expectancy of the first-generation beneficiary
  • IRA owners who want to adopt IRAs that include the extended/stretch provision should check the IRA agreement to ensure it gives a beneficiary the right to designate a successor beneficiary, and for the IRA to be passed on to a succession of beneficiaries
  • If a beneficiary inherits an IRA that does not allow for the designation of successor beneficiaries, he/she may transfer the inherited IRA to a financial institution where the IRAs do allow such designations

Written By

Denise Appleby

Denise is CEO of Appleby Retirement Consulting Inc., a firm that provides IRA resources for financial/ tax/legal professionals. She has over 20 years of experience in the retirement plans field, which includes training and technical consultation.

Denise writes and publishes educational /marketing tools for advisors; available at http://irapublications.com. Denise co-authored several books on IRAs

Denise is a graduate of The John Marshall Law School, where she obtained a Masters of Jurisprudence in Employee Benefits, and has earned 5 professional retirement designations.
She has appeared on numerous media programs, sharing her insights on retirement tax laws.

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