As financial advisors have learned in countless articles and seminars, such is the wondrous wealth that compounding can produce with a multigenerational IRA, or IRA stretchout. Dad (assumed to be older and likely to die first) builds up a tax-deferred retirement account, rolls it into an IRA and leaves it to Mom. She can take the IRA she inherited from Dad and name her own beneficiary or beneficiaries, stretching distributions over a joint life expectancy that assumes the beneficiary is 10 years younger than she is. After Mom dies, minimum distributions can be spread over the beneficiary's true life expectancy, prolonging tax deferral and allowing the account to keep growing. 

  Do stretch IRAs really work the way they do in computer-generated illustrations? Yes, in some situations. 

  "One of our clients inherited an IRA of just over $1 million," says Wil Heupel, an advisor with Accredited Investors in Minneapolis. "With a 36.7-year life expectancy, only 2.725% had to be withdrawn the first year, a percentage that increases very slowly. In the past three years, the IRA has earned 11.5%, so it has kept growing, to nearly $1.4 million. If we maintain that investment performance, the IRA balance will increase until the client has only eight years of life expectancy." 

  However, not every real-world report of an IRA is so upbeat. ''All IRA stretchout projections are based upon years of minimum distributions, which might not be the case," says Brent Brodeski, an advisor with Savant Capital Management in Rockford, Ill. "Some heirs are going to want to take the money right away, even if that means paying income tax." 

  Mark Wilson, an advisor with Tarbox Equity in Newport Beach, Calif., concurs, noting that his father died recently, leaving an IRA to be divided among four children. "Some will stretch out distributions, and some won't," he says. "Dad did not want to exercise too much control, so he left that decision up to us." The IRA was not left to a trust from which a trustee could dole out distributions. 

  Details of this IRA stretchout were handled in advance. "Fidelity is the custodian," says Wilson, "and the people there have been extremely cooperative." Nevertheless, he was surprised when he got the paperwork for the "beneficiary designation account" and noticed that the beneficiary line was stamped, "beneficiary not allowed." 

  That is, Wilson would be allowed to take minimum distributions over his 48-year life expectancy, if he wished, extending the tax deferral. 

  However, if he were to die before that period was up, the balance of the account would be paid to his estate for accelerated distributions. 

  On the other hand, if Wilson were allowed to name a beneficiary, the beneficiary could continue the stretchout over the remainder of Wilson's 48-year life expectancy. In some circumstances, the amounts involved could be substantial. 

  "I made a few calls," says Wilson, "and was told I could name a beneficiary. Apparently, this is the type of thing that's permitted but not advertised: You have to ask for it." Thus, financial advisors in such situations may be able to perform a valuable service for clients, obtaining a further beneficiary designation that many other account holders won't know is available. 

  Not all IRA custodians are so cooperative, even if coaxed by a beneficiary or an advisor. Peggy Ruhlin, an advisor with Budros & Ruhlin Inc., Columbus, Ohio, tells of one bank that failed to meet the one-year test because it was "too busy," and thus blew the stretchout. "It was a relatively small IRA, about $80,000, but the client certainly didn't intend to pay the income tax as soon as will be required." 

  The "one-year test" refers to IRAs and other tax-deferred retirement accounts that are inherited by a nonspouse before the account owner starts taking required minimum distributions. Ordinarily, such accounts must be distributed by the end of the fifth calendar year following the account owner's death. However, distributions over the beneficiary's life expectancy are permitted if those distributions begin in the calendar year after death. 

  ''Financial advisors must be aware of crucial deadlines, and they need to be persistent when dealing with balky custodians," says Kathy Stepp, an advisor with Stepp & Rothwell in Overland Park, Kan. "One of my clients lost both parents within a year. Two children have been named as beneficiary of a $1.2 million IRA, in addition to other assets. The custodian of the IRA is the same local bank that also is acting as estate executor and trustee." 

  This bank, according to Stepp, moves slowly on everything, including the IRA stretchout. "We'd like to get the IRAs separated and moved to Schwab, where we have most of our accounts," she says. "At the same time, we want to get the distributions started before Dec. 31 of the year following death, to qualify for a stretchout over the children's life expectancy. Bank officials, though, have dragged their feet on everything. They don't return calls, and they don't do what they said they would do." 

  Part of the problem, Stepp says, is that the bank does not want to lose this large IRA. "In addition, there has been some turnover among the bank personnel. When someone new comes in, we have to start all over, explaining what we'd like to do." 

  Missing the next-year deadline is not the only problem that may arise when a nonspouse inherits an IRA before the required beginning date. To qualify for the stretchout, the account should be kept in the decedent's name, perhaps in a special "for the benefit of" account, but changing the account's name to that of the beneficiary results in a taxable distribution. 

  "In one case," says Brodeski, "the IRA custodian changed the name of the decedent's IRA to the beneficiary's name. We were able to get the account changed back to the decedent's name, but now the custodian is throwing up roadblocks to prevent us from moving the account, as we'd like to." 

  Ken Greenblatt, an advisor with Time Capital Investor Advisory Services in Melville, N.Y., relates a similar story. "An IRA stretchout was arranged and agreed upon so the client - the beneficiary - was feeling comfortable," he says. "However, when the IRA owner died, the custodian changed the name, retitling the account in the name of the beneficiary. Fortunately, we were able to catch it and have it changed back before a 1099-R was sent out, reporting the income to the IRS. Once that's done, it's too late: There's no 'oops' clause in the tax code." 

  Greenblatt has another client with $1.5 million in a tax-deferred 403(b) retirement plan and no other assets. This plan gives nonspouse beneficiaries only two choices, he says. "They can take an annuity or take the amount in a lump sum. Practically speaking, I doubt that a beneficiary would want to take this amount in a lump sum and pay more than $600,000 in income tax." 

  The most likely choice, Greenblatt says, is to take an annuity. "In that case, the beneficiary gives up access to the principal. There might be $300,000 worth of estate tax due, but no money to pay it with." 

  Therefore, Greenblatt has advised his client to transfer the account to another company, one that will permit the beneficiary to keep the money in the decedent's account. Then the beneficiary would have access to principal, as needed, yet be able to stretch out the remainder of the account over his life expectancy. "I've been telling my client to do this for a while," he says, "but the family has had severe personal and health problems, so nothing has been done." The risk, of course, is that the client will die holding onto this plan, with its limited options for beneficiaries. 

  The problem, says Greenblatt, is that this is an old contract, one that was written without considering the possible desire for a stretchout, and the contract has not been revised. "It's possible to switch to a newer, more flexible contract. In fact, the same insurer might have such a contract. The client must take action, though." 

  In this situation, says Greenblatt, the insurance company administering the 403(b) plan does not want to incur the legal costs involved in revising an old contract. Other tales of recalcitrant custodians are not difficult to discover. For example, Wilson reports that his firm has been called in (by another advisor) to help a client who inherited half of a large tax-deferred retirement plan. "Two sisters are the beneficiaries," he says. "One wants to take the cash, but the other wants the stretchout. The insurance company is not willing to stretch: The people there have said it's 'not legal' to do so. We're working on convincing them to split the plan and stretch half of it, but it's not easy." 

  If an uncooperative custodian doesn't curtail a stretchout, an ill-advised professional advisor may be the culprit. "One of my clients got a divorce when he was in his mid-50s," says Woody Young, an advisor with Quest Capital Management in Dallas. "Unbeknownst to us, he used his divorce lawyer to change his IRA beneficiary designation. The lawyer named some charities along with the client's 21-year-old daughter, which meant that the daughter's life expectancy could not be used." 

  The client died shortly thereafter, before Young could discover how the IRA beneficiary designation had been handled. "Here was a perfect opportunity to stretch an IRA that was greater than $700,000," he says. "His daughter could have had lifelong security, enjoying tax-deferred compounding over many decades. Instead, the entire amount had to be paid out within five years, which accelerated the income tax payments on top of the estate tax that already had been paid." 

  Other problems with stretchout IRAs may stem from intrafamily misunderstandings. Ruhlin suggests a family meeting so that the entire IRA stretchout can be explained to all concerned. "One woman, with five kids, inherited an IRA from her husband," she says. "She rolled it to her own IRA, and split her IRA into five accounts. Now each child is the beneficiary of one IRA, which is a big advantage to the younger children because there's a 20-year age difference between the oldest and youngest child." 

  That is, the youngest child will have a much longer life expectancy and will be able to have a much longer stretchout for the inherited IRA. If the IRA had stayed in one account, all the money would have to be withdrawn over the eldest child's short life expectancy, after the mother's death. "This woman is now taking required minimum distributions," says Ruhlin, "evenly from each IRA, so she gets five checks each month. Some clients really get it." Thanks to savvy advisors, such clients' children and even those children's descendants may continue to get it.