Advisors have a special weapon when it comes to IRA plans, a way to get more out of them, and it involves the plans' beneficiaries.
The advantage of a traditional IRA comes from the tax-deferred growth it offers. The "stretch" IRA strategy, using the beneficiary's life as well, extends the lifetime of tax-deferred growth offered by the account.
A stretch IRA keeps the IRA intact and growing for as long as possible after the IRA’s owner dies, said Sarah Brenner, director of retirement education for Ed Slott and Company at the firm’s Instant IRA Success Workshop in Las Vegas earlier this month. In essence, it allows the IRA to keep growing throughout the lifetime of the beneficiary.
“The stretch IRA is not a type of IRA, like traditional, Roth and stretch,” said Brenner. “Instead, it’s a strategy, a way to use the rules in the tax code to keep the IRA intact and growing for as long as possible for generations. That’s the power of the stretch IRA.”
By using the stretch IRA strategy, beneficiaries can spread required post-death minimum distributions across their own life expectancy using the IRS’s single life expectancy table for inherited IRAs.
For example, if a client dies and has named his or her 14-year-old daughter as the beneficiary of a $600,000 IRA, the daughter will be able to stretch required minimum distributions (RMDs) across her 69-year life expectancy.
The younger the client, the higher the life expectancy and thus the lower the RMD, which would allow more funds to remain in the IRA over time. Advisors and clients might consider using the youngest potential non-spouse heir as an IRA beneficiary to maximize the potential advantages of the stretch strategy.
Yet many advisors—and retirement savers—believe that the stretch IRA is no longer an option, said Brenner.
“Paul McCartney is kind of like the stretch IRA,” said Brenner. “Both are always surrounded by rumors of their impending death.”
Regardless of the age of the original account holder, any IRA can be a stretch IRA if advisors and retirement savers keep a few key rules in mind.