Particulars of the Stretch IRA

The stretch IRA concept is a wealth-transfer strategy that can help you extend the period of tax deferred earnings on your retirement assets. After the owner of the IRA dies, the beneficiaries will also have the longest allowable period of tax-deferral on the required distributions of the IRA assets. This strategy can allow distributions from your retirement assets to be extended over several generations. Because of this, your family could save significant dollars in income taxes over their lifetimes.

A stretch IRA strategy can be established at any time, as long as you have named an individual person as the beneficiary. It's also important to name an individual person as a contingent beneficiary in case your primary beneficiary predeceases you. If set up correctly, your beneficiaries should be able to take their required IRA distributions over their individual life expectancies.

However, there are a number of steps that need to be followed to put this strategy in place. These steps include the following:

1. Selection of individual beneficiaries. As previously mentioned, you will need to designate an individual beneficiary. Although there might be certain reasons for naming a trust as a beneficiary (e.g., asset protection for the beneficiaries), you should keep in mind that you will jeopardize the ability to use this strategy if you do it. Even with a qualified trust, distributions must be paid out over the life expectancy of the oldest beneficiary. With this in mind, you could jeopardize your ability to stretch out distributions to your grandchildren if you name a trust as the beneficiary.

2. Discuss your plans with an experienced advisor. The benefits of this strategy could also be jeopardized if the IRA is not set up properly. Therefore, you need to speak with an experienced tax advisor who has worked with this strategy before.

3. Establish and maintain separate accounts for your beneficiaries. If you have two or more beneficiaries, you need to set up a separate account for each one of them. You should also designate a certain percentage of you IRA assets to each of your beneficiaries. By doing this, each beneficiary can then choose to have their share distributed over their individual life expectancy.

4. Inform your beneficiaries of your plans. You should also let your beneficiaries know about their future interest in your account when you pass away. There are a couple of other things to keep in mind. The names of the account holder and the individual beneficiary must appear on the IRA account, and the beneficiary distributions must begin no later than Dec. 31 of the year after the death of the account holder. If these rules are not followed, the funds from the IRA could be exposed to a significant income tax penalty for missing the required mandatory distribution (50% of the distribution that should have been taken).

On a final note, it should be remembered that this strategy may not be suitable for everyone. For example, if you think that you will need access to your IRA money to meet your daily living needs during retirement, then this strategy might not help you.

Please note I always advise people to consult with their own qualified legal, tax, and financial advisor prior to making any investment decisions.

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I look forward to meeting you!