Stretch IRA

The stretch IRA is also commonly referred to as the multi-generational IRA. It is important to understand that this is not a separate, or different, IRA account. It is simply a provision that the IRS made in the early 2000s, which allows for a non-spousal beneficiary to stretch their inherited IRA out over their life expectancy, thus, creating a multi-generational tax advantaged IRA.

If the stretch IRA is set up properly by the custodian of the IRA, an individual’s retirement account has the potential of benefiting the individual, the individual’s spouse (if the spouse survives the individual), and the next generation of the children, and, perhaps, even the grandchildren.

Most people are familiar with the fact that when a spouse inherits an IRA under the spousal inheritance rules, the spouse does not have to take the IRA in a lump sum. The spouse can take a lifetime distribution based on their life expectancy. This allows the spouse to stretch the value of the IRA out. It also allows the spouse to not pay the taxes all at once, but instead spread the tax liability out.

Most people are familiar with the concept that when an IRA transfers to the next generation, the children, under the old IRS provisions, have to take the IRA in a lump sum, or they can spread it out over five years. But, within the provision by the IRS of the stretch or multi-generational IRA, the life expectancy tables now go all the way down to age one. Therefore, when a child or a grandchild inherits qualified IRA money, they don’t have to take it in the lump sum or in five years. Instead they can take a pension-like income distribution that will last their entire lifetime.

What are the benefits of doing this? Imagine that when you get to be 70 ½ the IRS tells you that you have to take your entire IRA out in a lump sum or in five year payments. That would be a tax nightmare for you. If your IRA is not set up properly as a stretch IRA, then that is indeed the nightmare your children will face when they inherit your IRA at the end of your lifetime.