By Ahmie E. Baum, CFP
 
 

The Stretch IRA
A Wealth-Transfer Strategy to Consider

Although you initially established an IRA as a nest egg for your retirement years, you may also want to consider using your IRA as a vehicle to pass wealth to your heirs--particularly if you have various sources of retirement income and do not need to draw funds from your traditional IRA. You may choose to keep your traditional IRA intact until reaching age 70 1/2, at which time you must begin taking required minimum distributions (RMD). The discussion that follows will focus on a strategy to withdraw the minimum amount required each year under IRS guidelines and to maximize the tax-deferred compounding on the assets remaining in the IRA for as long as possible. This strategy is commonly referred to as the "stretch IRA."

What is a Stretch IRA?
The stretch IRA is not a type of IRA, but rather a wealth-transfer strategy that can be used in an effort to prolong the life of your traditional IRA for many years beyond your lifetime. Essentially, when you choose to use the stretch IRA strategy, you are extending the life of your IRA through your beneficiary choice so that your IRA assets may continue to grow tax-deferred over a number of years and potentially benefit future generations. By using this strategy, you and your heirs will have an income stream over the longest allowable period until the IRA assets are eventually exhausted.

Who Should Consider the Stretch IRA Strategy?
The Stretch IRA might not be appropriate for everyone, but it may be if you:

  • Are looking for a way to spread out the tax burden over as long a period of time as possible,

  • Want to maximize the tax-deferred growth of your IRA,

  • Are seeking a way to potentially extend the life of your IRA over several generations,

  • Do not need to rely on your IRA as a source of income, or

  • Want to pass wealth to your heirs.

How Far Can Your IRA Be Stretched?
When considering the stretch IRA strategy, it is important to keep in mind that the longevity of your IRA is contingent upon a number of factors, a few of which include:

  • The length of time in which assets are invested,

  • The rate of return on the investments in your IRA,

  • Whether you, and subsequently your beneficiaries, are taking just the minimum distributions required by IRA guidelines or are taking additional amounts, and

  • Whether you and/or your beneficiaries live beyond your respective life expectancies.

As you can see, a stretch IRA offers an interesting wealth transfer strategy for the right situation.