Coaches and athletes say stretching is good for you. Turns out, stretching is also good for your finances. If you’ve ever heard someone talk about a “stretch IRA,” it’s not a new product. It’s a method of making your wealth last longer. With some planning, I believe you can make an IRA last for a generation or more.
In most cases, someone who owns an IRA has to begin drawing on it, or taking required minimum distributions called RMD in finance-speak, when he or she turns 70.5 years old. The amount the IRS requires you to take out is based on the U.S. government’s life expectancy table, which you’ll find here.
Let’s say John Smith holds a traditional IRA worth $100,000 on Dec. 31, 2015. John dies on Jan. 1, 2016. If his wife Jane was 74 in the year prior to John’s death and his sole beneficiary, then Jane would take an RMD of $7,092.20. If, instead, the sole beneficiary was John’s son Mike, age 50 in 2014, then Mike’s RMD would be $2,923.98. If grandson William, who’s 25 years old, were the sole beneficiary, then he would take an RMD of $1,718.21.
The formula is simple: Younger beneficiaries take less RMDs. With the right planning in place, John’s beneficiaries can stretch out the value of his bequeathed IRA. He may decide to designate grandchildren as beneficiaries, instead of his spouse or even children, so the value of his IRA can reap tax-deferred growth for a longer period of time. Whoever inherits the IRA will see that stretching out the IRA distributions increases the opportunity for additional tax-deferred growth. Remember, IRAs can be estate-planning documents. So make your trusted advisor (whoever he or she is) aware of what you have. And consult with them. If you inherit an IRA, speak with a knowledgeable advisor before you tap the funds.
Finally, there’s been talk in Congress of trying to eliminate the stretch IRA because it wasn’t meant to be an estate planning tool. According to Congress, the point of the IRA was to benefit the people who earned it, not the retiree’s children and grandchildren. What Congress is proposing is this: If you don’t use your IRA during your lifetime, then it must be cashed out within five years. That’s a proposal, not a law. But if Congress were to make it law, then there are still strategies you can deploy to help your heirs.
Do you have questions about stretching your IRA? Contact me at [email protected].