The Stretch IRA – “The 9th Wonder of the World”

DO NOT LET YOUR IRA BECOME AN INTERNAL REVENUE ACCOUNT “ESTABLISH AN IRA FAMILY BANK” by Bill Kanter, J.D., M.B.A.

“With the blessing of the IRS, a scenario can be created where the value of any inherited IRA can grow into a fortune. The reason most people don’t create this scenario for themselves and their families is simple: They don’t know about it.” Ed Slott, “America’s IRA Expert” in his book Parlay Your IRA into a Family Fortune.

The stretch IRA concept is a wealth-transfer strategy that will let you extend the period of tax- deferred earnings on your retirement assets. After the owner of the IRA dies, the “designated beneficiaries” will have the longest allowable period of tax-deferral on your IRA assets. This strategy allows distributions from your IRA to be extended (or “stretched”) over several generations. Because of this, you can turn a modest IRA into a FAMILY FORTUNE FOR GENERATIONS. If set up correctly your beneficiaries will be able to take their Required Minimum Distributions (RMD) over THEIR life expectancies.

There are a number of choices that need to be made to put this strategy in place. These choices include:

1. Choose the Designated Beneficiaries. As previously mentioned, you need to name “designated beneficiaries” (see IRS Publication 590). There ARE valid reasons for naming a trust as a beneficiary (e.g., so that children do not withdraw the entire IRA right away and be hit with a huge tax bill). You should know that with a trust there are many details that must be followed in order to make certain that the distributions will be paid out to the youngest beneficiary.

2. Choose the appropriate advisor. The benefits of this Stretch strategy could be jeopardized if the IRA is not set up and distributed properly. For example, if you have multiple beneficiaries, you need to set up separate accounts for each one of them. Because of the many rules, you need to speak with an experienced advisor who has worked with this strategy before.

3. Choose the Ideal IRA Custodian. The ideal IRA custodian will a) guarantee principle, b) guarantee minimum income, c) establish the required sub accounts, d) provide a binding beneficiary document that will control the distributions after the owner dies (if a trust is not warranted), e) Administer the RMD payouts for generations and f) CHARGE NO FEES.

4. Choose the Ideal Asset Vehicle for Your IRA. Because a Stretch IRA is set up to last many generations and because RMD’s must be taken out of the IRA even if the account value is down, it is important to choose the right asset for the IRA. The right IRA asset is one that CANNOT GO DOWN IN VALUE and has NO FEES. The best IRA asset is an Equity Indexed Annuity from an A+ rated insurance company.

There are a couple of other things to keep in mind. The names of the account holder and the individual beneficiary must appear on the IRA account form, and the beneficiary distributions must begin no later than Dec. 31 of the year after the death of the account holder. If these rules are not followed, the funds from the IRA could be exposed to a significant income tax penalty for missing the required mandatory distribution.

On a final note, other retirement accounts such as 401(k)’s or 403(b)’s or company pension plans might not be able to be stretched properly. Upon the owners death the beneficiaries would take outright ownership of these accounts and pay the taxes on them (approximately 1/3rd). A rollover to a properly established IRA (or a Roth IRA) will make certain that you obtain the benefits of the stretch strategy.

Do you want to know more about the benefits of the stretch IRA strategy? Email or call Bill Kanter J.D., M.B.A. at Complete Estate & Retirement Planning. 847-674-6470. bill@completeerp.com.