Investor Education

Stretch IRA Strategy

Investors with significant assets need effective strategies for transferring their wealth in a tax-efficient manner. Using a “stretch” IRA distribution strategy can enable your Individual Retirement Account (IRA) to continue to grow tax-deferred – for the next generation.

By making wise beneficiary choices, you can extend the life of your IRA for a future generation. If you do not need all the assets in your IRA to pay your expenses in retirement, you may want to consider a Stretch IRA strategy.

Potential Candidates for a Stretch IRA Strategy

When you open a Traditional IRA, you have the option of naming one or more beneficiaries. If you name your spouse as a beneficiary, when he or she inherits the IRA, your spouse has the option to roll the assets into his or her own IRA. Once the assets are rolled over into his or her own IRA, your spouse can name his or her own beneficiary. If you name a beneficiary who is not your spouse, he or she can choose to transfer the assets to an inherited IRA and take Required Minimum Distributions (RMDs) based on his or her own life expectancy. If you plan to leave these IRA assets to your heirs, you may want to consider naming younger beneficiaries.

Non-spouse beneficiaries must take RMDs each year from a Traditional or Roth IRA. Since the RMDs are based on the life expectancy of the beneficiary, younger beneficiaries have a longer payout period, which results in lower payout amounts. These distributions from Traditional IRAs are taxed as ordinary income at the beneficiary’s federal income tax rate; however, distributions from Roth IRAs are generally not.

For Roth IRAs, the Stretch strategy is different in that the spouse beneficiary is never required to take RMDs. This can extend the Stretch IRA strategy for Roth IRAs.

Please keep in mind that tax laws are subject to change and that inflation may impact the value of your retirement investments over time.

Key benefits of a Stretch IRA Strategy

When your beneficiary inherits a Traditional IRA, he or she has choices to make. If a beneficiary elects to take the entire amount at once or distribute the assets over five years, these options generally result in accelerated payments and potentially higher taxes. However, beneficiaries who do not need immediate access to the inherited funds can choose to take only required distributions and spread payments (and any potential federal income tax) over their lifetime.

Additionally, these beneficiaries can extend the “stretch” even further by naming their own beneficiaries. While the successor beneficiary is required to take withdrawals based on the remaining life expectancy of the original beneficiary, he or she is not required to withdraw any additional amounts unless he or she chooses to. Please keep in mind that stretch distribution options are only available for persons named as beneficiaries, not entities.

In the example below, John, age 65, the original owner of a $500,000 Traditional IRA, names his 61-year-old wife Lisa as beneficiary. When John dies at age 82, Lisa rolls over the assets to her own Traditional IRA. Rather than leaving the Traditional IRA to her 41-year-old son, Lisa names her 18-year-old granddaughter, Sarah, as beneficiary. Based on her granddaughter’s longer life expectancy, Sarah’s distributions could stretch for 37 years (versus 17 for her father) – with potential earnings of $483,263 and total distributions of $883,259.

Naming a Younger Beneficiary Can Help Extend the "Stretch"

 1 This example is for illustrative purposes only and is not meant to represent any specific investment. The example assumes a 4% annual rate of return and does not take into account state or federal taxes and assumes RMDs are taken annually. This example does not address the impact of a Stretch IRA strategy on a Roth IRA or qualified employer-sponsored retirement plan. Investors should consider the risks and benefits of a Stretch IRA strategy in light of their individual financial circumstances.

Consider asking your financial professional about the benefits of consolidating retirement accounts. If you have retirement assets in a former 401(k) or other employer-sponsored plan, rolling them over to an IRA may be beneficial if you plan to leave these assets to your beneficiaries.

Many employer retirement plans require beneficiaries to take distributions either immediately, or within five years of the original account owner’s death. This could limit the benefits of tax-deferred growth by forcing beneficiaries to withdraw assets sooner than they need to.

Your financial professional can help do a beneficiary review of all of your retirement accounts, as well as help you review your asset allocation, investment options and track your performance. Contact your financial professional to help determine if a stretch IRA strategy is right for you.

Please note that the stretch IRA strategy is designed for account holders who will not need the assets in their IRA for their own retirement needs. You should consult with your financial professional and tax or legal advisor before adopting such a strategy.

Investors should consider the investment objectives, risks, charges, and expenses of the fund carefully before investing. Download a prospectus that contains this and other information about the fund, and read it carefully before investing.

This information is general in nature and is not intended to constitute tax advice. Please consult your tax advisor for more detailed information on tax issues and advice on your specific situation.