What Is a Expand IRA?
A stretch IRA was an estate planning strategy that extends the tax-deferred status of an inherited IRA when it is passed to a non-spouse beneficiary. It granted for continued tax-deferred growth of an Individual Retirement Account (IRA). The SECURE Act, part of the spending bill passed by the Senate on Dec. 19, 2019, and awaiting the signature of President Trump, exterminated the ability to use stretch IRAs. This will change estate planning for many taxpayers who employed this master plan to shelter inherited income. Here’s how the strategy worked.
By using the stretch strategy, an IRA could be passed on from period to generation while beneficiaries enjoyed tax-deferred and/or tax-free growth. The term “stretch” does not represent a specific classification of IRA; rather it is a financial strategy that allowed people to stretch out the life—and therefore the tax advantages—of an IRA. A very young beneficiary could enlarge out distributions for decades. Under the new law, non-spouse beneficiaries will have to take the funds in the inherited IRA within 10 years from the end of the original account owner.
Key Takeaways
- Stretching out an IRA gives the funds potentially decades to compound tax-deferred—except that the ploy was ended by the SECURE Act, passed on Dec. 19, 2019, and awaiting presidential approval.
- Non-spousal heirs must take required least distributions (RMDs) based on their life expectancy, so passing the IRA to younger heirs stretched how long it can continue to produce before funds must be withdrawn.
- Stretch IRAs were especially beneficial used with Roth IRAs because classifications are generally tax free.
- The new limit: 10 years after the death of the original account holder, regardless of the age of the beneficiary.
Mastery of Stretch IRAs
Stretching out an IRA gives the funds in the IRA more time—potentially decades—to compound tax-deferred. This caters the opportunity to grow the funds significantly for future generations. With a traditional IRA, the owner has to begin taking the required slightest distribution (RMD) by April 1 of the year after turning 70½—another rule that will change with the Protect Act. The new RMD age is 72, unless you are already 70½ or more as of Dec. 31, 2019. The RMD is calculated by taking the account balance on Dec. 31 of the previous year, and arranging that number by the number of years left in the owner’s life expectancy (as listed in the IRS’s “Uniform Lifetime” table). Each year, the RMD is deliberate by dividing the account balance by the remaining life expectancy.
Non-spousal heirs of any age, regardless of the type of IRA, must take RMDs based on their subsistence expectancy (rules for inherited IRAs are different for spouses and non-spouses). The younger the beneficiary, the lower the RMD, which allows profuse funds to remain in the IRA to stretch the IRA over time. This is why many stretch IRAs are passed to the youngest member of a relatives.
Stretch IRAs: Who Uses Them
In general, wealthier retirees who know that their spouse will partake of enough money for retirement will use a stretch IRA to maintain their family’s wealth by naming the youngest person in their division as a beneficiary. Their minimal RMD taxes will mean that the remaining sum in their IRA will continue to grow tax-deferred. Anyhow, not all IRAs allow the stretch strategy, and investors should check with their financial adviser or financial college to determine if beneficiaries will be allowed to take distributions over a life-expectancy period.
Stretch IRAs are especially helpful when used with
Stretch IRA Developments
In 2016–2017, it was rumored that new legislation would put an end to the stretch IRA and require non-spouse beneficiaries to use a five-year proscribe for required minimum distributions. But with the passage of the Tax Cuts and Jobs Act, the stretch IRA was given a reprieve.
But that reprieve deliquesced away with the passage of the SECURE Act.