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'Stretch' IRAs

Print Posted by Andrew Chan April 27, 2011 03:45 PM

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What is a Stretch IRA account?

A "stretch IRA" is a not an actual type of IRA account that you can “open” like you do for a traditional IRA, Roth IRA, SEP-IRA, or SIMPLE IRA. Rather, the term “stretch IRA” refers to a traditional IRA or Roth IRA that includes certain provisions that make it easier to keep funds in the IRA after the IRA owner dies. These provisions will generally allow the beneficiaries to continued the tax-deferred growth of the funds in the IRA over a longer period of time. An IRA or Roth IRA that does not have these provisions may be required to distribute the funds in the IRA account more aggressively than the beneficiary needs or desires.

Many people may know that owners of non-Roth IRAs are required to take minimum distributions from their non-Roth IRAs during their lifetime starting at age 70.5 (also referred to as “lifetime requirement minimum distributions”). However, many may not know that all IRAs (including Roth IRAs) are also subject to certain required minimum distribution rules after the IRA or Roth IRA owner dies. The amount and timing of these required minimum distributions are determined based on several factors including, who the owner names as his/her beneficiaries, whether or not successor beneficiaries are named, and whether or not the IRA owners dies before beginning his/her lifetime required minimum distributions.

Keep in mind that IRA “stretch” provisions and strategies are largely based on the required minimum distribution rules, which can be complicated and confusing. In addition, they are not the right solution for everyone. In general, “stretch” provisions are more useful in situations where the IRA’s beneficiary can afford to minimize the distributions from the inherited IRA and thus, extend the tax-deferred growth of the inherited IRA for their heirs. If you are considering the use of these strategies, you may want to consult with a financial planning and estate planning professional as part of your comprehensive retirement and estate planning work.

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About the contributors

Andrew Chan is the founder of Integrative Financial Advisors in Framingham. He provides comprehensive financial planning advice and investment management services. He has been an adviser for over 12 years and works with clients to integrate all aspects of their finances including investments, retirement, education funding, and tax planning.

Cheryl Costa is a managing director at AFW Wealth Advisors, which has offices in Natick and Purchase, N.Y. She advises clients on investing, education funding, and estate planning. She holds a master’s in business administration from Boston University.

Jamie Downey has been an accountant for more than 14 years. He's a partner at Downey & Co. in Braintree. Prior to joining the firm, he served as a manager in the audit department of accounting firm KPMG.