Stretch IRA

What is a “stretch IRA?” If an IRA owner defers his or her account until 70.5 years of age…then takes just RMD each year (with no distributions in excess of RMD - even though the IRA owner could liquidate the entire IRA account). Then the IRA owner dies, and the IRA asset goes to the spouse. The spouse defers until she or he is 70.5 years old, and then takes RMD each year (with no distributions in excess of RMD). Then the spouse dies, and the asset goes to the son or daughter. Instead of liquidating the IRA and buying a house (non-stretch), the son or daughter defers the IRA over his or her life expectancy and pays RMD each year. In this manner the asset grows tax deferred getting excessively large over time.

What are the problems with the “stretch IRA?”

1. You can’t use the money before or after retirement (with the exception of RMD - if you want to stretch the IRA).
2. Your spouse can’t use the money (with the exception of RMD - if you want to stretch the IRA).
3. The contingent beneficiary should be named on the IRA account before the death of the original IRA account holder, due to some custodians not allowing the stretch option.
4. If the original IRA account holder converted to a Roth IRA in the first place, the net balance received by contingent beneficiary would have been larger (since the account is not taxed).

That’s the bottom line. If you plan to give your IRA to your beneficiary…then convert the asset to a Roth. The only problem with the Roth is the contingent beneficiary must take RMD that’s tax free. He or she can not liquidate the Roth in full, or the account reverts back to the same tax liability as the IRA.

Sincerely,

John Bagwell

The Truth About Financial Products.com

www.thetruthaboutfinancialproducts.com