The latest new individual retirement account (IRA) is a stretch IRA. This concept is used to pass the proceeds from an IRA to younger generations rather than to your spouse or peers. IRA owners must begin receiving distributions by the age of 70 and ½. The distributions are based on the life expectancy of the owner. Older owners will have a greater required minimum distribution (RMD) while younger owners will have a much smaller RMD.
Comparing the RMD of a retiree who is 73 years old, versus the grandchild of an individual with a stretch IRA, you will see how the money saved in the original IRA could potentially last two or more lifetimes. A good example is looking at how a $500,000 IRA would be distributed. The original owner would be required to take a minimum distribution of a little over $20,000. If this same IRA was inherited by a child, and that child was 55 years old, their minimum distribution would be around $17,000. If instead of a child, it was a 28 year old grandchild that inherited the IRA, they would have to take a minimum distribution of approximately $9000. If the grandchild was only 6 years old, that distribution would be around $7000 per year.
The amount of the distributions is based on the IRS Single Life Expectancy Table. Potentially, depending on the amount accumulated in the IRA and the lifespan of the beneficiaries, the stretch IRA could span several generations. If the stretch IRA is a traditional IRA or a Roth IRA both will benefit from tax deferred growth even if the distributions are being directed to a beneficiary. Traditional IRA distributions will be taxed as ordinary income and Roth distributions are usually tax free.
This product has the capacity of passing on supplemental income that grows tax deferred to future generations, stretching the IRA’s proceeds significantly. This is especially true if the rate of growth for the IRA is consistent year after year and decade after decade. It also opens up a new means of passing on one’s wealth without the dealing with the burdensome process of probate and the estate taxes associated with probate.
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