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Retirement Strategies Stretch IRAs have been all over the news lately from USA Today to MSN Money. And with all this nice publicity, it might seem like some brilliant financial planner invented a brand new kind of retirement plan. But actually, there is no such thing as a “stretch IRA.” But there is a way to make your IRA last for generations and grow tax deferred for many, many years.  You see the term “stretch IRA” really refers to a wealth generation transfer strategy instead of a kind of retirement plan. But with IRAs, Roth IRAs, 401k’s, Roth 401k’s, 403b’s, Roth 403b’s, Defined Benefit Plans, and Defined Contribution Plans, who needs a new kind of retirement plan anyway? That’s one of the best aspects about “stretching” your IRA. You can defer taxes, invest globally and make your IRA last for generations—and you don’t even have to switch retirement plans.  Tax Deferral Can Continue Long After Your Death  Most people name their spouse, or partner, as the beneficiary for their retirement plans. And normally that’s as far as the planning for IRA transfer ever goes. Now in most, (but not all) cases, the spouse or partner is relatively close in age to the deceased IRA holder. If we assume both individuals live to their normal life expectancy and start taking minimum distributions when they are required, then the IRA won’t last more than a few years beyond the first IRA holder’s death. And then usually the rest of the IRA funds go to the estate or the children. But then the entire IRA is full taxable upon distribution.  Remember, one of the advantages of an IRA is it continues to grow tax deferred. That means a smart investor can get an IRA to last as long as possible while letting their nest egg grow tax deferred. That’s really the idea behind a so-called “stretch IRA.”  Over the last 20 years, I’ve learned in that most people initially plan on taking the money out of their retirement plan as soon as they can, but then change their minds later. Once they get to retirement age they discover they don’t really need the money and don’t want to pay the taxes until they have to.  They would rather let their retirement fund continue to compound assets as long as they can. Most of the clients I’ve handled don’t touch their retirement plan until they absolutely must start taking distributions (usually at age 70).  Here is the idea of how this particular wealth transfer would work. And I need to put a little disclaimer in here: there are many different ways to illustrate this type of wealth transfer strategy. This is just one realistic example.

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JJ dies at 71. Betty, who is 66, elects to treat JJ’s IRA as her own and names their son Reginald as the beneficiary. Betty doesn’t take her RMD until she turns 70 and is lucky enough to live another eight years. She withdraws US$156,123 during her remaining lifetime. 

Betty dies at 77. Reginald is 53 and “takes over” the account. He names his daughter Wilma as the ultimate beneficiary. Reginald MUST begin to take distributions. (Once the IRA passes beyond the spouses, distributions must continue or start based upon the beneficiaries age and RMD.) 

Reginald lives to age 75 and withdraws US$933,576 during his lifetime. At his death the IRA now passes to his daughter Wilma who MUST continue to take the distributions based upon her Dad’s original RMD table. She takes distributions for another nine years and is fortunate enough to receive a total of US$1,026,841 during that time frame. The IRA has now been depleted. 

Over three generations a US$300,000 IRA was able to pass on over US$2 million in income. Not bad, and all it took was a little proper planning. 

The rules governing distributions are not as complex as they sound. Distributions can’t extend beyond the first non-spouse beneficiaries’ life expectancy. In our example above, Reginald is the first non-spouse beneficiary. His life expectancy at age 53 when he inherited the IRA from his mother, Betty, was 31.4 years. When Reginald died at age 75, his 45 year old daughter, Wilma, was able to “stretch” her IRA distributions for another nine years, which equaled Reginald’s original life expectancy. 

You should consider “stretching” your IRA to keep it from being included in the estate of someone who passes away. If a beneficiary was not named, any remaining assets would be treated as a lump-sum distribution subject to both estate and income taxes. This is by far the least favorable way to distribute your IRA assets and should be avoided at all cost. 
How Do You Stretch Your IRA?

All you have to do to utilize this “stretch” IRA technique is fill out the beneficiary election form that comes with ALL IRA applications. And you can change your beneficiary election as often as you want.

For example, when JJ sets up his IRA, he names his wife Betty as the “spousal” beneficiary by using the beneficiary election form. When Betty inherits the IRA, she names her son Reginald as the beneficiary, and Reginald in turn names his daughter Wilma.

In some cases, an IRA beneficiary form may allow for the original IRA holder to name successor beneficiaries to his or her primary beneficiary in advance. I should point out this is not an “all or none” proposition. There are no prohibitions against splitting your IRA into multiple accounts and naming a different beneficiary for each one. However, if you name a beneficiary other than your spouse, he or she has to sign a document acknowledging and allowing someone else be named as the beneficiary.

Once again I want to mention that a properly structured IRA or retirement plan can not only invest in the U.S. but can invest overseas in virtually any kind of investment, including non-U.S. real estate. My motto is “Liberate Your IRA”—and that often means taking your IRA or “stretch” IRA offshore.

Financial planning and tax planning are complicated subjects. As always you should consult your own advisor for tax or legal advice.
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