Estate Planning with Retirement Accounts

Retirement accounts offer unique opportunities to grow one’s wealth with certain tax benefits. Often these benefits can be used by future beneficiaries.

Stretch Individual Retirement Accounts (IRA)

A Stretch Individual Retirement Account, or an Inherited IRA, allows an individual’s IRA to be “stretched” or passed on to future generations. An IRA will typically include a stretch provision when the owner of the IRA has other resources to finance his retirement years so that the funds will instead be primarily used for providing for the needs of the chosen beneficiaries.

Standard vs. Stretch IRA

In a standard IRA, the beneficiary is required to distribute the assets within a short period after the owner’s death. On the contrary, a Stretch IRA calls for distributions by the beneficiary over their life-expectancy period and also allows the beneficiary to designate future beneficiaries.

In the event of a “stretch” provision, the beneficiary’s life expectancy is determined shortly after the owner’s death. The beneficiary is then obligated to withdraw a calculated minimum amount each year for the remainder of that life expectancy (or else he must pay a penalty).

If the original, first-generation beneficiary of a Stretch-IRA dies prior to fulfilling his presumed life expectancy, the second-generation beneficiary named by the original beneficiary will continue the distribution for the remainder of the original beneficiary’s life expectancy, collecting the same annual minimum amount as calculated in the beginning. This can continue on for future generations (third-generation beneficiary, fourth-generation beneficiary, etc.) until the whole balance of the IRA is distributed.

The beneficiary can defer paying taxes on the balance of the Stretch IRA. In addition, he can discontinue the planned stretch at any time by distributing the entire balance of the IRA.