Stretch IRA

Submitted by Anthony Zalesky on Fri, 2015-06-12 14:30

If an individual names a charity as a primary beneficiary of an IRA for a percentage, and also names a child as a primary benee for the balance, can the child do an inherited IRA and stretch the distributions out over their lifetime?



Submitted by Alan - IRA critic on Fri, 2015-06-12 16:42

Yes, but only if the child creates a separate inherited IRA account by 12/31 of the year following the year of the owner’s death OR the charity is paid off by 9/30 of that same year. If neither of these deadlines are met, the child’s stretch is basically lost. If there is doubt about the child meeting the deadline, then the IRA should be split into one for the child and another account for the charity.

Submitted by Aaron Tanner on Tue, 2019-05-14 19:14

CFP website indicates must split IRA into separate beneficiary accounts prior to 12/31 of the year of death of original IRA owner….not 12/31 year after original IRA owner’s date of death as indicated by Alan-iracritic above.http://www.letsmakeaplan.org/blog/view/lets-make-a-plan-blogs/leaving-a-charitable-legacy-with-an-iraSince you generally want to utilize the “Stretch IRA” concept to postpone income tax payable by beneficiaries, you can fix this in one of two ways.  You can divide the IRA while alive and name the child as the sole beneficiary of the first IRA and the charity as the sole beneficiary of the second IRA.  Or, if you have already passed, then your executor can segregate your IRA into two equal parts before December 31st of the year in which you die, and then pay out the charitable IRA.  The child could then take distributions over his or her life expectancy (stretch-out). Another caveat is that IRA beneficiary forms require the use of percentages, versus dollar amounts.  This can create a problem if you have made a gift pledge to a charity for a specific dollar amount, and want the remainder to go to your children.  This issue can be solved if the IRA custodian will accept an attachment with specific instructions to the IRA beneficiary form.  

Submitted by David Mertz on Tue, 2019-05-14 20:44

  • The answer provided by Alan-iracritic is correct.  The deadline for establishing separate accounts is 12/31 of the year following the year of death.
  • The CFP article is correct that establishing separate accounts by 12/31 of the year of death will meet the requirement (because 12/31 of the year of death is a full year before the deadline), but incorrectly seems to suggest that the deadline is earlier than the actual deadline.  Establishing separate accounts before the end of the year of death *will* make is easier for the beneficiaries to satisfy any unsatisfied portion of the decedent’s year-of-death RMD since they won’t have to file Form 5329 to request a waiver of the excess-accumulation penalty for taking this distribution in a later year.
  • See Q&A-2 of § 1.401(a)(9)-8:  https://www.law.cornell.edu/cfr/text/26/1.401(a)(9)-8
  • Also see Separate accounts on page 12 of 2018 Pub 590-B:  https://www.irs.gov/pub/irs-pdf/p590b.pdf

Submitted by Alan - IRA critic on Tue, 2019-05-14 20:53

  1. The CFP website is in error. The original IRS Regs 1.401(a)(9)-8 were amended effective 6/1/2004 by TD 9130 to state that separate accounts must be established no later than the end of the year following the year of death in order for the separate accounts to disregard other separate accounts for RMD purposes. Perhaps the CFP was unaware of this amendment to the Regs.
  2. The article also indicates that the executor should create separate accounts. In the example where the IRA is left to a charity and to one child, the executor has no authority to act with respect to the IRA as the estate is not a beneficiary. The IRA passes outside of the estate and is not subject to probate.
  3. Note that IRA RMD rules follow those for DC plans except where exceptions are made in Reg. 1.408-8. No exceptions were made to the separate account rules in 1.401(a)(9)-8 as amended.
  4.  It was stated that the charity beneficiary would trigger the 5 year rule, but the 5 year rule never applies unless the decedent passed prior to the RBD. If decedent passed after the RBD, the remaining life expectancy of the decedent determines RMDs if no separate account for the child was established by the deadline of 12/31 of the year following the year of owner’s death.
  5.  In said example, if the charity is paid off by the beneficiary determination date (9/30 of the year following the year of death), the child is the only beneficiary remaining. Therefore, even if the child returned the paperwork late the child effectively has a separate IRA account when the charity is paid off. Child could then stretch the child’s share over child’s LE starting in the year following the year of death.
  6. In summary, there is no need to change the post I made in 2015.

Submitted by Alan - IRA critic on Tue, 2019-05-14 21:53

  • What actually constitutes a separate account is itself interesting. In a qualified plan, there obviously cannot be a beneficiary controlled separate account, therefore in these plans “separate accounting” within the plan establishes separate accounts. In such a plan this separate accounting will generally be accomplished by the deadline unless there is a delay in submitting the death certificate and other required info beyond the deadline. If that occurs the stretch will be impaired. For an IRA, custodians generally do not want to setup separate accounting within the same IRA account, therefore for an IRA a separate account is typically  separate under it’s own account number.
  • Pub 590 B does create some questions under the paragraph “multiple individual beneficiaries”. There it states that separate accounts need to be established for EACH beneficiary or the shortest LE will apply. I cannot find anthing in the Regs that support the requirement that EACH beneficiary must have established the separate account by the deadline. I see no reason that if one of 3 beneficiaries does set up their separate account and the other two miss the deadline, that the beneficiary who did establish a separate account should not be able to use their own life expectancy, then the other two would have to use the shortest LE of those two. Similarly, if there are two individuals and only one acts to establish a separate account, then by default the other one also has a separate account since they are the only beneficiary remaining on the other IRA. Have never seen this discussed. DMx, would be interested in your thoughts here.

Submitted by Aaron Tanner on Thu, 2019-05-16 19:13

Great information as we have a client looking to split primary beneficiary between family and charity.  You cleared up the conflicting information found.

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