Stretching an IRA

Stretching-an-IRA-IMAGELeaving money to your children or any other beneficiaries doesn’t have to be a one-time deal. According to AARP Magazine, you can actually leave money to your kids or grandkids that increases over time, “with a little bit of planning on your part—and a little educating of your beneficiaries.” This type of IRA is called a stretch IRA, and “extends its tax advantages like taffy across generations, provided, of course, the account is not depleted.” The original owner has rights to use the IRA funds first, but if there are still funds in it, the IRA can be withdrawn in several different stages, rather than in a lump sum. Instead, according to AARP Magazine, “it can flow from the account in small increments stretched out over the beneficiary’s lifetime… or even beyond.”

The only trick to this type of stretched IRA is that all beneficiaries must be on-board with the process and understand the flow. This means that sitting down with a qualified estate-planning attorney is an essential first step to ensure that all parties are on the same page. After the holder of an IRA dies, that IRA can be passed down to his children or grandchildren. To make an IRA stretch, if you’re a beneficiary, the first rule is to not roll the inherited IRA into your own. Doing this means that the money in the inherited IRA is taxable. Instead, “you must retitle the IRA with your name and the deceased’s name.”

Once you’ve done this, you MUST begin to make the required minimum distribution withdrawal beginning on December 31 of the year after you inherited it. That money will be taxable, but it’ll be considerably less than if it had been distributed in one lump sum. The amount of the required minimum distribution varies depending upon the age of the beneficiary. The younger she is, the less she’s required to take out. Doing it this way allows the money left in the IRA to grow, if it’s invested wisely. One inherited IRA has the potential to become the next generation’s inheritance.

If you or someone you know is beginning to plan your estate, don’t go through it alone. The most important first step is to contact a dedicated estate-planning attorney today.