Beneficiary of a Beneficiary–the stretch
In some discussions of Stretch IRAs the point is made that the IRA can stretch out for many generations. My understanding though is that an inheriting beneficiary of a beneficiary can never be able to calculate based on his own life expectancy but would have to use the original beneficiary’s life expectancy under any and all circumstances.
So let’s say you had grandpa Steve as owner, son George as primary beneficiary, and grandson Fred as contingent beneficiary. Grandpa Steve dies, and son George keeps the IRA going many years, only taking RMD’s and then he dies. But George had named his own beneficiary Fred as his primary beneficary. That would mean that while Fred may still keep grandpa’s IRA going, the RMD’s wouldn’t under any circumstances be able to be based on Fred’s lifetime, but on the original beneficiary George’s lifetime.
Is that correct? And if not what code reference says otherwise?
Permalink Submitted by mk foss on Sat, 2010-12-18 21:14
You are absolutely correct. The maximum stretch occurs when you have a spouse beneficiary to start with. Say Dad has an IRA and takes RMDs based on the uniform table. When he dies Mom as the beneficiary does a rollover and names son as her beneficiary. She uses the uniform table as well. At her death son uses the single life table – all further RMDs are based on his age in the year after Mom’s death – whether or not he lives long enough to collect them.
The uniform table is based on 2 beneficiaries instead of one. A 70 year old has a factor of 27.4 based on the uniform table – 3.6% of the previous IRA balance. A 70 year old using the single life table has a factor of 17.0 or 5.9% of the previous 12/31 balance. In addition, the uniform table factors increase more slowly than those on the single life table.
The other way to maximize the stretch is when husband names wife as beneficiary – she rolls it over and remarries and names hubby #2, at her death he rolls it and names a new wife, etc etc Most folks do not plan to use this alternative. It sounds like fun, though.
Permalink Submitted by Lee Mertisnon on Sat, 2010-12-18 22:41
Thanks for your helpful and prompt reply. (And also I’m still chuckling over the endless swapping out of spouses.)
Permalink Submitted by Alan Spross on Sun, 2010-12-19 00:52
Anna Nicole Smith and J Howard Marshall would have been a classic such case with a 62 year age difference if only Marshall had not been too old to even have an IRA. This scenario done 5 decades later might have become a candidate for the longest stretch IRA on record. 🙂