Stretch IRA

Stretch IRA

The Stretch IRA is a wealth transfer strategy that gives you the opportunity to “stretch” your IRA over several future generations. As an IRA owner, you are typically required to begin taking distributions from your IRA at age 701⁄2. If you have inherited someone else’s IRA and you are not the surviving spouse, you are generally required to take distributions each year regardless of your age.

Most IRA owners name their spouse as the primary IRA beneficiary, with their children being named as contingent beneficiaries. While there is nothing wrong with this strategy, it might require the spouse to take more taxable income from the IRA than what is really needed. If income needs are not an issue for the spouse and children, then naming younger beneficiaries (such as grandchildren or great-grandchildren) allows you to stretch the value of the IRA out over generations. This is possible because grandchildren are younger and their required minimum distribution (RMD) figure will be much less (see the following example).

John (age 75) and his wife Betty (age 72) worked together as successful business owners of a phone answering service company. They saved well and amassed a large sum of money. In addition to a solid retirement, they planned a nice estate for their son Alex (age 45) and his family, consisting of his wife Megan (age 42) and their daughter Emma (age 16).

Knowing that Alex and his family would be fine with the estate prepared for them, John and Betty wanted to do something specifically for their only grandchild Emma. John decides to leave one of his IRAs worth approximately $150k directly to Emma by naming her the primary beneficiary. He takes his required minimum distributions from other IRAs in order to leave the full balance of the IRA for Emma untouched.

Contact your Wealth Advisor for more details.

At age 79, John passes away and Emma (now 20) inherits the IRA worth $200,734. Emma is required to take minimum distributions from the IRA since she is a non-spouse beneficiary. Emma receives approximately $3,200 in the first year and continues to take distributions each year. By taking only the RMD amount, she is able to enjoy supplemental income while potentially increasing the IRA balance to $815,513 when she reaches her retirement age of 65.* This example assumes a 6% annual return which may or may not be achieved due to market fluctuations.

John’s decision to leave his IRA to Emma allows for many years of tax-deferred growth, boosting Emma’s retirement savings while providing additional income to Emma in her working years as well.

If you think this strategy might be beneficial for your situation, please discuss it with your Wealth Advisor.

* Source: Sungard

We recognize that each client’s investment needs and goals are different. This illustration does not take into account the particular investment objectives, financial situation or needs of individual investors. No guarantee is made as to the reasonableness of the assumptions. Past performance may not be indicative of future performance and we make no representation that historical prices or returns will be achieved in the future.

Securities offered through J.J.B. Hilliard, W.L. Lyons, LLC Member NYSE and SIPC. Hilliard Lyons does not offer tax or legal advice. Please consult your tax advisor or attorney before making any decision that may affect your tax or legal situation. ©2018 All rights reserved.

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J.J.B. Hilliard, W.L. Lyons, LLC | Member NYSE, FINRA, & SIPC

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