Stretching Your IRA

By Marvin Rotenberg, IRA Technical Expert

If you don’t need all the funds currently in your IRA you might want to “stretch” them. This refers to the process of extending the term of your IRA over multiple lifetimes through the use of existing distribution rules, the power of tax beneficial compounding and sound estate planning techniques.

The best way to do this with a traditional IRA is to leave it alone and then only withdraw annual required minimum distributions (RMDs) from it once you attain age 70 ½. No distributions from a Roth IRA are required during your lifetime, so if you have one, all the money can stay there and continue to grow tax-free. In both cases, the objective is for the bulk of the funds to be inherited by your heirs, lasting through their lifetimes, while continuing to generate additional wealth through those years.

All the fun begins when you die. (isn’t that always the case?) Your beneficiary will have to take RMDs based on their single life expectancy commencing in the year after your death. This is also true for a Roth IRA. The only difference is that distributions from a Roth IRA will be fully tax-free, provided at least five tax years have passed since you first established a Roth IRA. Until that time, any earnings that are distributed will be subject to tax (but don’t worry about this too much, as earnings are the last dollars distributed from a Roth).

To the extent your surviving spouse is the beneficiary of your IRA he or she can roll some or all of it over into his or her own IRA or simply keep it in your account and be subject to the RMD rules as a beneficiary. In the latter case, if you die before attaining age 70 ½, your spouse can wait until the year you would have reached age 70 ½ to begin to begin taking mandatory payments if he or she is your sole beneficiary.

If you are looking to stretch the IRA over a long period of time you might want to consider naming a child, grandchild, or other younger individual as beneficiary. Doing so will result in a smaller annual distribution due to their longer life expectancy periods, leaving more assets in the IRA with the opportunity to generate additional wealth for the beneficiary.

If the thought of leaving younger beneficiaries with direct control over how rapidly funds can be withdrawn from your IRA following your death distresses you, consider using an intervening trust as beneficiary to control the flow of dollars to these individuals. This will cost you a bit more, but it will be well worth the money if it puts you at ease. You’ll need to employ the services of a qualified financial advisor or attorney to help put this in place, as the rules here are very stringent.

If you are inheriting an IRA make sure the new account is titled correctly. For example, Bill Lee dies and his two children are named equally as his primary beneficiaries. By December 31 of the year following the year of death, two separate beneficiary-inherited IRAs must be established and completely funded (one half to each) and the title of the inherited IRAs should read:

Bill Lee IRA Deceased, [date of death], FBO (name of the child). 

The account title can in no way reflect the beneficiary as direct owner, otherwise the assets will be considered distributed and subject to income tax, as applicable.

Professor Albert Einstein once said “the most powerful force in the universe is exponential notation.” We know this within the context of the compounding of money. You should know it the same way and one of the best examples of this is a stretch IRA.