Many people associate tangible assets when thinking of estate planning, but it’s critical to think about your accounts too. Many elderly people have individual retirement accounts (IRAs) – which act as ways set aside money to fund your retirement years, without having to pay taxes on those funds. Avoiding taxes is critical for retirement when you’re living without regular income and hoping to pass on some of your hard-earned funds to your loved ones.

A stretch IRA is exactly what its name implies – a more flexible retirement account that can carry that benefit of flexibility over to the next generation, and even the generation after that! Let’s take a closer look.

What Exactly is a Stretch IRA?

Investopedia explains a stretch IRA is an estate planning strategy that extends the tax-deferred status of an inherited IRA when it is passed to a non-spouse beneficiary. It allows for continued tax-deferred growth of an Individual Retirement Account (IRA).

How Can It Help Your Loved Ones?

The term “stretch” does not represent a specific type of IRA. Rather, it is a financial strategy that allows you to stretch out the life – and therefore the tax advantages of an IRA. Investopedia explains the benefits of this strategy as allowing your IRA to be passed on from generation to generation, all while beneficiaries enjoy tax-deferred and/or tax-free growth. According to CNBC, “stretching” an IRA allows young beneficiaries to benefit from years of tax deferral while taking our small required minimum distributions over their lifetime.

A stretch IRA is a way to invest in the future of your loved ones. When you name a loved one as the beneficiary of your stretch IRA, it helps ensure that they will have financial stability during their own retirement years. Not only will your heirs benefit from years of growth, but setting up the inheritance to be drawn out over time mitigates the tax bill produced by cashing out a traditional IRA, explains financial experts at Kiplinger.

Leaving a Stretch IRA to Your Spouse vs. Another Loved One

As you consider setting up a stretch IRA for your loved ones, it’s important to understand the difference between choosing your spouse as a beneficiary or choosing another person to inherit the funds.

  • If Your Spouse is the Beneficiary: Surviving spouses have a lot of flexibility when it comes to inheriting a stretch IRA, explains Kiplinger. Spouses can take the inherited IRA as their own IRA or they can remain a beneficiary. Only spouses have the option to roll an inherited IRA into their own retirement account. Spouses also have the flexibility to remain a beneficiary for some time and then later roll the inherited IRA into their own IRA.
  • If a Non-Spouse is the Beneficiary: If you choose another loved one who is not your spouse to be the beneficiary of your stretch IRA, the inheritance rules are very different. Non-spouses only have the option to stretch the IRA over their lifetime, and they must carefully follow specific steps to ensure that this happens.

How Can You Help Your Loved Ones Maximize a Stretch IRA?

As part of your estate planning, you might consider a few steps that will make inheritance easier for your loved ones. When you implement a stretch IRA, it’s important to help your heir(s) understand what that means. It’s helpful and often critical to explain to your beneficiary how they are intended to benefit from the stretch IRA and the steps they need to secure those benefits. Financial planners at Kiplinger recommend sitting down with your heir(s) and explaining your wishes and intentions regarding the money you are leaving behind. Because stretch IRAs come with strict deadlines for inheritors, it can save a lot of headaches to explain the process to your beneficiaries in advance.

Just a few examples: If your beneficiary is a non-spouse, they must carefully rename the account to include both their name and your name and clearly identifying who is the inheritor and who is deceased. In addition, a non-spouse is required to withdraw distributions from the account every year by December 31.

What Is the Best Way to Learn More or Get Started?

Do you think a stretch IRA might be a good fit for your estate plan? At the Estate, Trust, and Elder Law Firm we’re here to help find the perfect solutions for your unique needs and preferences when it comes to planning for the future. We can help you understand how a stretch IRA can best work for you and best benefit the generations to come, and help you incorporate a stretch IRA into your estate plan. Contact our Stuart office at 772-261-8556 or online. Serving Treasure Coast seniors and those who love them.

 

The Estate, Trust, and Elder Law Firm, P.L.

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2940 S. 25th Street

Fort Pierce, FL 34981

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Stuart, FL 34994

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Port St. Lucie, FL 34986

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Okeechobee, FL 34972

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