A Stretch IRA is a traditional IRA that passes from the account owner to one or more younger beneficiaries at the time of the account owner’s death. Since the younger beneficiary has a longer life expectancy than the original IRA owner, he or she can stretch the life of the IRA by receiving smaller required minimum distributions (RMDs) each year over his or her life span. More money can then remain in the IRA with the potential for continued tax-deferred growth, which could provide significant long-term benefits to the beneficiary.

This so-called stretch provision is an added benefit of the retirement investment vehicle, though it is not necessarily a tax-saving strategy for the initial IRA owner.  Taking advantage of it has no effect on the initial account owner’s RMD requirements, which continue to be based on his or her life expectancy.

Once the account owner dies, however, beneficiaries have the option to begin taking RMDs based on their own life expectancies. Whereas the owner of a traditional IRA must begin receiving RMDs after reaching age 70 1/2, beneficiaries of a traditional IRA must begin receiving RMDs after the account owner’s death. In either scenario, distributions are taxable to the payee at current income tax rates.

Beneficiaries have the right to receive the full value of their inherited IRA assets by the end of the fifth year following the year of the account owner’s death. However, by opting to take only the required minimum amount instead, a beneficiary can theoretically stretch the IRA and tax-deferred growth throughout his or her lifetime.

Note that the information presented here applies to traditional IRAs bequeathed to a nonspousal beneficiary. Special rules apply to spousal beneficiaries. Contact your financial advisor or tax professional for more information.


Portions of this article was provided by the Financial Planners Association and Perspective Financial Services, a local FPA  member. © 2013 S&P Capital IQ Financial Communications. All rights reserved.