The Stretch IRA and Why it's Important

You may have heard the term “stretch IRA” being used in the financial services industry along with “multi-generational IRA” and “perpetual IRA.” What is a stretch IRA? Does it last forever? Can any financial organization offer stretch IRAs? Is a special IRA agreement necessary to establish a stretch IRA?

A stretch IRA is not a special type of IRA created by Congress. There are no special IRA agreements that establish stretch IRAs but a financial organization may want to add language to its current IRA agreements to enable stretching.

The term “stretch” here refers to a method for extending the duration of traditional and Roth IRA beneficiary distributions to certain successor beneficiaries, beyond the death of an original designated beneficiary—a method especially valuable to a nonspouse beneficiary.

After an IRA owner’s death, a spouse beneficiary can treat an IRA as his/her own if he/she is the only beneficiary. If there are multiple beneficiaries, a spouse beneficiary can always take a distribution of his/her share in an IRA and roll it over to a personal IRA. Once the assets are in his/her own IRA, he/she can name his/her own death beneficiaries.

After an IRA owner’s death, a nonspouse IRA beneficiary, under the final required minimum distribution (RMD) rules, generally takes RMDs based on his/her single life expectancy. An original beneficiary’s death generally requires distribution of any remaining IRA assets in a single sum to his/her estate. With stretching, the duration of death distributions can continue to a series of successor beneficiaries beyond the death of an IRA’s original beneficiary but not forever.

The regulations prohibit a death distribution period from extending beyond an original nonspouse beneficiary’s single life expectancy even though RMDs continue to successor beneficiaries. All beneficiaries base their RMD calculations on the original beneficiary’s life expectancy, not on any life expectancy of any successor beneficiary. This calculation guarantees the depletion of an IRA’s assets because the original beneficiary’s life expectancy factor decreases each year, eventually reaching 1.0 or less, requiring a full distribution that year.

1. Some pitches for 'stretch' IRAs stretch truth from USA Today
2. Stretch your IRA to help your grandkids from MSN Money
3. The New S-t-r-e-t-c-h IRA from the Motley Fool