Stretch IRA

Stretch IRA Individual Retirement Account Tax-Deferred Earnings Estate Planning Retirement Planning
A Stretch IRA is an Individual Retirement Account (IRA) structured to extend the period of tax-deferred earnings beyond the lifetime of the original account holder, potentially benefiting multiple generations.
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Definition

A Stretch IRA is an Individual Retirement Account (IRA) designed to extend the period of tax-deferred earnings after the original account holder’s death. This type of IRA allows for the naming of multiple beneficiaries, who can stretch the disbursement period over their own life expectancies, thereby prolonging the tax-deferred growth of the funds.

Examples

  1. Example 1: Parent to Child
    A 70-year-old individual has an IRA and names their 40-year-old child as the beneficiary. When the parent passes away, the child inherits the IRA and can take Required Minimum Distributions (RMDs) over their own life expectancy, thus extending the period of tax-deferral.

  2. Example 2: Grandparent to Grandchild
    A grandparent names their 10-year-old grandchild as the beneficiary of their IRA. Upon the grandparent’s death, the grandchild inherits the IRA, and the distributions are stretched over the grandchild’s long life expectancy, maximizing the compounding effect of tax-deferred earnings.

Frequently Asked Questions

1. Can a Stretch IRA still be established under the SECURE Act of 2019?
Under the SECURE Act, the Stretch IRA has been largely eliminated for non-spousal beneficiaries who must now withdraw the entire balance within 10 years of the original account holder’s death unless they qualify as eligible designated beneficiaries (EDBs).

2. Who qualifies as an eligible designated beneficiary (EDB)?
EDBs include the surviving spouse, minor children (until they reach the age of majority), disabled or chronically ill individuals, and anyone not more than 10 years younger than the decedent.

3. How does a Stretch IRA benefit the account holder’s beneficiaries?
Beneficiaries can potentially experience significant tax savings and continued growth of the inheritance due to the power of compounded tax-deferred earnings over a longer time frame.

4. Are there any special considerations for trusts as IRA beneficiaries?
Yes, trusts can potentially still use the stretch strategy under certain circumstances, but the terms of the trust must comply with IRS rules to avoid adverse tax results.

  • Individual Retirement Account (IRA): A tax-advantaged account that individuals can use to save and invest for retirement.
  • Required Minimum Distribution (RMD): The minimum amount that must be withdrawn annually from a retirement account, starting at age 72.
  • Eligible Designated Beneficiary (EDB): Certain individuals who can still stretch IRA distributions over their lifetimes, as defined by the SECURE Act.
  • SECURE Act: Legislation enacted in December 2019 that made significant changes to retirement plan rules.

Online References

Suggested Books for Further Studies

  1. The New Retirement Savings Time Bomb: How to Take Financial Control, Avoid Unnecessary Taxes, and Combat the Latest Threats to Your Retirement Savings by Ed Slott
  2. Retirement Planning Guidebook: Navigating the Important Decisions for Retirement Success by Wade D. Pfau
  3. IRA: Federal Tax Rules & Guidelines for Individuals and Financial Institutions by CCH Tax Law Editors

Fundamentals of Stretch IRA: Retirement Planning Basics Quiz

### What is the primary benefit of a Stretch IRA? - [ ] Immediate access to funds - [ ] Conversion to a Roth IRA - [x] Extended tax-deferred growth - [ ] Avoiding RMDs > **Explanation:** The primary benefit of a Stretch IRA is the extended period of tax-deferred growth beyond the original account holder's lifetime. ### Which legislation significantly altered the rules for Stretch IRAs? - [ ] Dodd-Frank Act - [x] SECURE Act - [ ] Tax Cuts and Jobs Act - [ ] Pension Protection Act > **Explanation:** The SECURE Act, enacted in December 2019, significantly altered the rules for Stretch IRAs by introducing a 10-year distribution rule for most beneficiaries. ### Who still qualifies for the Stretch IRA benefits under the SECURE Act? - [ ] Any designated beneficiary - [ ] All non-spousal beneficiaries - [x] Eligible Designated Beneficiaries (EDBs) - [ ] No one > **Explanation:** Eligible Designated Beneficiaries (EDBs) still qualify for Stretch IRA benefits. These include the surviving spouse, minor children, and chronically ill beneficiaries. ### How long do non-spousal beneficiaries generally have to withdraw funds from an inherited IRA under the SECURE Act? - [ ] 5 years - [x] 10 years - [ ] 20 years - [ ] Over their lifetime > **Explanation:** Under the SECURE Act, non-spousal beneficiaries generally have 10 years to withdraw all funds from the inherited IRA. ### What term refers to the minimum amount that must be withdrawn from a retirement account each year? - [ ] Deferred Annuity - [x] Required Minimum Distribution (RMD) - [ ] Stretch Allocation - [ ] Annual Withdrawal > **Explanation:** The Required Minimum Distribution (RMD) is the minimum amount that must be withdrawn from a retirement account each year, starting at age 72. ### What happens if a beneficiary fails to take the RMD? - [ ] The IRA reverts to the state - [ ] There is no penalty - [ ] The beneficiary loses the account - [x] A 50% excise tax is levied on the missed RMD > **Explanation:** If a beneficiary fails to take the RMD, they may face a 50% excise tax on the amount that should have been withdrawn. ### Under the new rules, who is *not* an Eligible Designated Beneficiary (EDB)? - [ ] The surviving spouse - [ ] Minor children of the decedent - [ ] Disabled or chronically ill individuals - [x] Adult sibling of the decedent > **Explanation:** An adult sibling of the decedent is not considered an EDB under the SECURE Act. ### Can trusts still be designated as beneficiaries for Stretch IRAs? - [x] Yes, with certain conditions - [ ] No, they cannot - [ ] Only for Roth IRAs - [ ] Only if the trust terms are revocable > **Explanation:** Trusts can still be designated as beneficiaries for Stretch IRAs under certain conditions, provided they meet IRS requirements to qualify as see-through trusts. ### Which account type is designed for tax-advantaged retirement savings? - [x] Individual Retirement Account (IRA) - [ ] Brokerage Account - [ ] Checking Account - [ ] Municipal Bond Fund > **Explanation:** An Individual Retirement Account (IRA) is designed for tax-advantaged retirement savings. ### What is the impact of the SECURE Act on inherited IRAs? - [ ] It eliminates RMDs - [ ] It reduces the tax benefits for all beneficiaries - [x] It introduces a 10-year rule for withdrawals - [ ] It requires immediate liquidation of the account > **Explanation:** The SECURE Act introduces a 10-year rule for most non-spousal beneficiaries to withdraw the entire balance of an inherited IRA.

Thank you for embarking on this journey through our comprehensive understanding of Stretch IRAs and tackling our challenging sample quiz questions. Keep striving for excellence in your retirement planning knowledge!

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