The Stretch IRA Strategy Being Reviewed

We’ve received some questions on the issue of the stretch IRA as a result of some recent legislative action in Washington.  Both House and the Senate have recently introduced bills to accelerate inherited IRA distributions and accordingly, taxes on inherited IRAs for non-spouse beneficiaries.

A stretch IRA is not a type of IRA but rather an IRA strategy.  Here’s how it works.  Most of us name family members as beneficiaries of their IRAs.  Some people alternatively name their estate or other organizations.  When naming non-human beneficiaries, you eliminate the possibility of heirs using a stretch IRA strategy.   The stretch IRA strategy is a way to use the rules in the current tax code to keep the IRA intact and growing for as long as possible for generations.

By using the stretch IRA strategy, beneficiaries can spread required post-death minimum distributions across their own life expectancy using the IRS’s single life expectancy table for inherited IRAs.

For example, if an IRA owners dies and has named his or her 14-year-old daughter as the beneficiary of a $600,000 IRA, the daughter will be able to stretch required minimum distributions (RMDs) across her 69-year life expectancy.

The younger the beneficiary, the higher the life expectancy and thus the lower the RMD, which would allow more funds to remain in the IRA and grow on a tax-deferred basis over time.  Some might consider using the youngest potential non-spouse heir as an IRA beneficiary to maximize the potential advantages of the stretch strategy.

To stretch an IRA, you need life expectancy.  If you have named your estate as the IRA beneficiary, it’s not too late—you can still change your beneficiary.

Naming a human beneficiary also helps heirs avoid probate, claims and other legal obstacles. An inherited IRA must also be properly titled so that it retains the original IRA owner’s name while also indicating it was inherited by the beneficiary.

The proposed legislation accelerates the time period by which non-spouse beneficiaries must take distributions (the House version is 10 years and the Senate version allows a stretch for the first $400,000 and any exceeding balance to be distributed within 5 years).

Importantly, the above does not impact IRAs inherited by spouses.  The current rules allow a spouse to rollover their deceased spouse’s IRA and declare as their own as “spousal IRA”.  This rule remained unchanged in the proposed legislation.  At age 70 ½, IRA owners must begin RMDs and the House proposal seeks to increase this to age 72.

We will follow-up with details and analysis in the event that the rules change.  In the meantime, it’s always good to review your beneficiaries every few years anyway so give us call and we can discuss.

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