The “stretch IRA” has become a popular way to refer to an IRA that has provisions that make it easier to “stretch out” the time that funds can stay in your IRA after your death, even over several generations.

It’s not a special IRA, and there’s nothing dramatic about this “stretch” language. Any IRA can include stretch provisions, but not all do.

Why is “stretching” important?

Earnings in an IRA grow tax deferred.

Over time, this tax-deferred growth can help you accumulate significant retirement funds. If you’re able to support yourself in retirement without the need to tap into your IRA, you may want to continue this tax-deferred growth for as long as possible.

In fact, you may want your heirs to benefit–to the greatest extent possible–from this tax-deferred growth as well.

But funds can’t stay in your IRA forever. Required minimum distribution (RMD) rules will apply after your death (for traditional IRAs, minimum distributions are also required  after you reach age 70½).

The goal of a stretch IRA is to make sure your beneficiary can take distributions over the maximum period the RMD rules allow. (IRS Rules here  Not endorsed by IFS)

So, you’ll want to check your IRA  agreement carefully to make sure that it contains the following important stretch provisions.

Key stretch provision #1

The RMD rules let your beneficiary take distributions from an inherited IRA over a fixed period of time, based on their life expectancy.

For example, if your beneficiary is age 20 in the year following your death, he or she can take payments over 63 additional years (special rules apply to spousal beneficiaries).

As you can see, this rule can keep your IRA funds growing tax deferred for a very long time.

But even though the RMD rules allow your beneficiary to “stretch out” payments over their  life expectancy, your particular IRA may not.

Your IRA might require your beneficiary to take a lump-sum payment, or receive payments within five years after your death. Make sure your IRA contract lets your beneficiary take payments over his or her life expectancy.

Key stretch provision #2

But what happens if your beneficiary elects to take distributions over his or her life expectancy but dies a few years later, with funds still in the inherited IRA?

This is where the IRA language becomes crucial. If, as is commonly the case, the IRA language doesn’t address what happens when your beneficiary dies, then the IRA balance is typically paid to your beneficiary’s estate.

However, IRA providers are increasingly allowing an original beneficiary to name a successor beneficiary. In this case, if your original beneficiary dies, the successor beneficiary “steps into the shoes” of your original beneficiary and can continue to take RMDs over the original beneficiary’s remaining distribution schedule!!

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What if your IRA doesn’t stretch?

You can always transfer your funds to an IRA that contains the desired stretch language.

 Upon your death, your beneficiary can transfer the IRA funds  directly to another IRA that has the appropriate language.

And if your spouse is your sole beneficiary, they can roll over the IRA assets to their own IRA, or elect to treat your IRA as their own.

Because your spouse becomes the owner of your IRA funds, rather than a beneficiary, they won’t have to start taking distributions until they reach age 70½. And your spouse can name a new beneficiary to continue receiving payments after your spouse dies.

Stretching your IRA–a case study

Jack dies at age 78 with an IRA worth $500,000. He had named his surviving spouse, 69-year-old Mary, as his sole beneficiary. Mary elects to roll over the funds to her own IRA. Mary names Susan, her 44-year-old daughter, as her beneficiary. At age 70½, Mary begins taking required minimum distributions over a period determined from the Uniform Lifetime Table. (Mary is allowed to recalculate her life expectancy each year.) At age 79, Mary dies and Susan begins taking required distributions over Susan’s life expectancy–29.6 years (fixed in the year following Mary’s death). Susan names Jon, her 30-year-old son, as her successor beneficiary. Susan dies at age 70 after receiving payments for 16 years, and Jon continues receiving required distributions over Susan’s remaining life expectancy (13.6 years). (See assumptions below.)

Year 1	Mary becomes owner of Jack’s IRA
Year 3	Mary begins taking distributions at age 70½ over her life expectancy
Year 12	Susan begins taking distributions the year after Mary’s death over Susan’s life expectancy
Year 28	Jon begins taking distributions over Susan’s remaining life expectancy
Year 40	All of Jack’s IRA funds have been distributed

Under this scenario, three generations are paid a total of over $2 million  over 40 years.

Assumptions:

• This is a hypothetical example and is not intended to reflect the actual performance of any specific investment portfolio.
• This example does not guarantee any future value.
• This illustration assumes a fixed 6% annual rate of return; the rate of return on your actual investment portfolio will vary over time, according to actual market performance. This is particularly true for long-term investments.
• Investments offering the potential for higher rates of return also involve a higher degree of risk to principal.
• All earnings are reinvested, and all distributions are taken at year-end.
• The projected figures assume that Mary takes the smallest distribution she’s allowed to take under IRS rules.
• The projected figures assume that tax law and IRS rules will remain constant throughout the life of the IRA.